If one thought it cannot get any worse for real estate companies, it just did. The move to take existing high-value currency notes out of circulation is likely to hit real estate companies the worst. The sector is known to be a safe haven for converting stock of black money into white, especially in high-value transactions.
While new notes will come into circulation, a temporary squeeze on liquidity is bound to be visible. High-value property deals and more specifically resale transactions involve large amounts of undisclosed cash transactions. One can expect to see a slowdown in transactions, which will further affect the performance of real estate companies.
Land deals are also likely to be put on hold for some time. Note that the sector is already battling a prolonged demand slowdown. In fact, it had become quite difficult to use cash for high-value transactions in India with the requirement of disclosure of PAN (permanent account number) for transactions valued at more than Rs.10 lakh.
“High investor-driven markets, NCR and Mumbai and high-ticket size units will feel the pressure of sales in the near-term. We do not expect high impact on end-user dominated markets and their product offerings.”, said analysts at Kotak Institutional Equities in a note.
Pan-India developers such as DLF Ltd had already found the going tough. Most developers had few launches in the last few quarters. But lower interest rates brought some hope for the sector. This move dashes hopes of a price recovery in the real estate market for some time. In the worst-case scenario, both demand and prices will get affected. A slightly better outcome is if prices decline which sees a revival in demand from buyers who don’t conceal their income from the tax authorities.
How this plays out in the medium to long term will become clear in due course. For the moment, the impact is negative. No wonder, the BSE real estate sector staged one of the worst falls among sectoral indices. It was 14% down with stocks like DLF crashing by 20% at 12 noon on Wednesday.
Scrapping Rs500, Rs1,000 currency notes may pull down property prices
Land and property prices, particularly those of luxury homes, are likely to come down in the short to medium term as a result of the government’s bold move to crack down on black money by scrapping Rs500 and Rs1,000 currency notes, said property advisors and company officials.
In a surprise move, the Union government on Tuesday, announced that from midnight, Rs1000 and Rs500 currency notes would no longer be legal tender.
“Land transactions and luxury residential segment would be impacted the most because they employ the maximum black money. In the short term, land prices and prices of luxury homes will see a correction of around 20-30%,” said Pankaj Kapoor, managing director, Liases Foras, a property advisory firm.
In a TV interview, Deepak Parekh, chairman, HDFC, also said real estate prices would come down in the short to medium term as land would become cheaper.
“Land transactions are mostly done in cash. This will put an end to it. I expect real estate prices to come down. People would not be able to take cash. They have to declare it. They have to pay tax on it,” Parekh said.
However, a few developers are not convinced that real estate would be impacted significantly though it would help reduce corruption in the long run.
“The primary real estate market would not be impacted as it is already regulated to an extent. Even land transactions in cash has significantly reduced in the last few years,” said Getamber Anand, president, Confederation of Real Estate Developers’ Association of India (Credai).
On a long-term basis, real estate developers said the government’s decision to curb black money would reduce corruption and bring transparency into the sector.
“The impact of this will be huge in many markets where payment of cash is mandatory and the major form of profit-taking. These markets will see a major crash making an already difficult situation even more challenging,” said Rohit Gera, managing director of Gera Developments.
“In addition to eliminating black money this will definitely bring down corruption at least for a while. In the medium to long-term the policy that emerges will determine how much corruption will return in due course,” he said.