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.