Impact of demonetisation on the real estate sector of India

By Indra Giri & Priya Chetty on March 20, 2017

The real estate market has been undergoing changes due to recent policies of the government and other initiatives. The move of demonetisation which involved currency ban was initiated by the current Government. With the introduction of demonetisation, the real estate sector was shaken up due to high involvement of cash transactions. According to Singh (2016), 35-40% of the money which was exchanged in black for selling and buying of pre-owned houses in Delhi NCR region has been curbed due to demonetisation. This will lead to unsold inventory of residential and commercial premises, increasing the drag on other sectors such as financial, steel, etc.

It has been estimated that 2,50,000 units of inventory with  over 1,20,000 units (highest) in Noida  itself is unsold (ASSOCHAM, 2016). But on the other hand, a report by the Government of India (2016) revealed that this territory is expected to grow at 30% over the next decade and shall touch US$ 180 billion by 2020. Rather, this move would bring down the property prices and assuage distant dream of owning a home for many city inhabitants (Dhonarkar, 2016).

Inventory pileup due to demonetisation in the real estate sector of India (Source: Business Today)
Inventory pileup due to demonetisation in the real estate sector of India (Source: Business Today)

Major real estate investors in Delhi NCR

Some of the major investments in Delhi have provided housing to many dwellers at plausible rates. Tata Housing Development Company (Arabella, Gurgaon Gateway and others), Omaxe (Palm Court, Trade Center in Greater Noida and others), DLF (Cybercity and others), Ansal API and others have formed Luxury Township with unique features to accentuate experiences of consumers in the living standard (Menon, 2013).

A report by JLL (2014) stated that the value of under constructed office space in India stands at 60% of the total value of which Delhi NCR stands second at 25% for concentration of such space. This has grasped scope of many investors such as DLF to secure a major investment in order to increase their chances of making money.

Factors affecting demand and supply

With introduction of schemes such as “Housing for All” by 2022 or subsidy  in “PM Awas Yojana”, the demand for the sector is on continuous rise. It is expected that Delhi NCR will have the highest demand of 24% for residential space by the end of 2020 (Cushman & Wakefield, 2016).

Major factors that determine demand and supply of real estate spaces in Delhi NCR are dominated by the following factors:

Infrastructure and amenities

The Delhi NCR region has been witnessing many infrastructural developments which are creating a positive influence on the real estate market. Enormously invested projects such as on DMIC (Delhi Mumbai Industrial Corridor), KMP (Kundli-Manesar-Palwal Expressway) and the FNG (Faridabad-Noida-Ghaziabad Corridor) will give a boost to the economy in conformity with other infrastructural development projects such as smart city projects (ICICI Property Service, 2015). Moreover, with extension of Delhi Metro Rail Corporation in Noida, Gurgaon and Faridabad, amenities have started expanding while improving the overall development of the reality sector.(Goswami, 2016)

Location and affordability

With economical budget to invest in the real estate sector in Delhi NCR and the growing township in sub-urban regions around it, customers are gaining ample choices in the middle range residential projects. Post demonetisation, the major metropolitan cities expect a drop of 30% in the prices with a maximum fall in the valuation of properties in Mumbai (Rs. 2,00,330 crore) followed by Bangalore (Rs 99,983) and Gurgaon of (Rs 79,059) (Press Trust of India, 2016). The potential of these opportunities is growing rapidly and with increased interest of renowned developers in areas such as Bhiwadi, Faridabad Expressway, Yamuna Expressway at affordable prices have further increased prospects of expansion in this sector (The Hindu, 2016).

Moreover, demonetisation along with the introduction of RERA (Real Estate Regulation and Development Act 2016) has strengthened the property sector with various measures in terms of transparency and accountability with the consumers. It has also controlled curbing off unscrupulous activities through effective regulation. According to JLL (2016) the step will make sure that only honest players survive in the market.

Declining home loan rates

An expected impact of demonetisation on real estate sector is downward trend in interest rate structure relieving people from high EMIs’ on housing loans (Dhonarkar, 2016). The infrastructure support and development from Government along with a huge spectrum financing at affordable rate of interest has improved the scope of buying a home in the metropolitan cities. The Reserve Bank of India in its sixth bi-monthly policy statement for 2017, gave global clarity on larger rate cut with respect to remonetisation. It also showed that future buyers would be benefited from the scheme (Dhawan, 2017).

Negligible impact of demonetisation on commercial real estate

Due to huge black money transactions involved in the real estate sector, the expected impact of demonetisation is observed in the housing space. On the contrary, according to Business Standard, the leasing of commercial sector remains unaffected in accordance with the effect (Press Trust of India, 2017).  Due to less acquisition of share in commercial business it is small and negligible impact is observed in the sector.

Migration and high per capita income

Every year around 6 lakh young workforce migrate to Delhi in search of lucrative jobs due to which there is an increased demand for rental residential homes. According to a report by the Government of India (2016) approximately 35% of the workforce travel to metropolitan cities for their jobs, creating a robust demand for the real estate sector. Moreover, the per capita income of Delhi is around 2.8 lakh per annum. This is much higher than the national average of 0.93 lakh per annum. With higher income the demand for real estate sector also increases. This is because the real estate offers one of the highest returns in India (PWC, 2016).

Future prospects after the demonetisation

With different initiatives introduced such as demonetisation and Real Estate Regulatory and Development Act, 2016 it is observed that huge involvement of black money and other unscrupulous activities involved in this sector will be controlled in the long run. Post demonetisation a decrease of 53% in the sale of units is visible but it has given scope to developers who would be more accountable to the consumers. The developers would be forced and promised to deliver their projects on time, maintain transparency, higher accountability, corruption free and veracious sector will be seen in the long run. Also, the implementation of GST (Goods and Services Tax) will increase investors’ confidence in the real estate sector. With such moves the major share of investors across the globe will approach India globally raising confidence of customers in reality sector.



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