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Business News/ Opinion / A long-term clean-up act
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A long-term clean-up act

In the long run, demonetisation will push the real estate sector towards more transparency

Ramesh Pathania/MintPremium
Ramesh Pathania/Mint

There has been no end to the debate around Modi government’s demonetisation move and its impact on various sectors. As I am from the real estate sector, let me talk about the impact on different asset classes in this sector. While bellwethers have been hinting at dark days ahead, these fears can at best be called unfounded when it comes to the Indian real estate business within the country.

Housing will never cease to exist as a basic necessity of human beings. So the real estate industry will not get wiped out.

There would be a definite change in the way of doing business and the industry as well as its different stakeholders are poised to become more transparent in the long term. Let’s look at how the major real estate segments will fare:

Residential real estate: The primary sales segment is largely influenced by home finance companies, and deals tend to be facilitated in a transparent manner. This segment will therefore see at best a limited impact in the larger cities, though some tier 2 and tier 3 cities, where cash components have been a factor even in primary sales, will see a business crunch.

The secondary or resale market will, however, certainly be affected, since this segment does see the involvement of cash. The luxury segment, which sees unaccounted for wealth of ultra-high net individuals get parked in such projects, will see a bigger impact. The demonetisation move is likely to result in luxury property prices dipping by as much as 25-30% as sellers struggle to offload properties to generate liquidity.

Commercial real estate: There will be a minimum impact on office leasing and transactions business; given that cash components do not play a significant role in such transactions.

Retail real estate: Given Indian’s propensity to make payments in cash, retail will see short-term impact on sales. Due to the liquidity crunch, a reduction in sales will continue in the short term, i.e., one-two quarters. This effect is being felt largely by small traders and the unorganised retailing segment prevalent on many high streets across the country, compared to the organised retailers and malls.

Segments such as jewellery and luxury have seen a higher impact than others, and this situation is likely to continue for a while. In the medium-to-long term, however, there is no threat to these sub-segments, as domestic consumption will recover from the temporary cash crisis. Importantly, the fact that retailers will encourage alternate or digital payment solutions will help the marketplace become more transparent and structured.

The luxury segment, with its historically high incidence of black money acceptance, will see more transactions in white than ever before. This bodes well for this business. The long-term growth scenario of Indian retail continues to be resilient and growth oriented. The domestic consumption story remains intact thanks to a strong economic base, favourable demographics and foreign direct investment (FDI)-friendly policies.

Land deals: Where land transactions have been happening in the realm of joint ventures, joint development or facilitating corporate divestments, there will be little effect of the demonetisation move. This is because joint ventures and developments and corporate divestments are all quite institutionalised, with little or no cash involvement.

Those carrying out direct land deals, however, will doubtlessly suffer, especially when it comes to agricultural land transactions, which tend to involve significant cash involvement. Land prices will plummet in the next few years, especially in the fringe areas of metros, and tier 2, and tier 3 cities. This could help in lowering apartment prices in these areas.

Hotel- and hospitality-related real estate will benefit from demonetisation in the long term, especially the organised hospitality sector in India. Combined with the general uptake in the sector, the movement of customers to the organised sector due to ease of alternate modes of payment will help the market. However, since the larger base of hotel rooms in the country is in the unorganised sector, we anticipate the general performance of the industry to witness some stress in the short term.

The organised banqueting business will witness growth, as customers move from the almost cash-only unorganised sector of stand-alone party venues and farmhouses to hotels, for want of non-cash means of payment. The wedding business will also return to Indian hotels from their overseas counterparts, as unofficial channels for offshore transfers of cash have dried up, forcing the cancellation of many Indian weddings from foreign locales back to hotel venues in India.

Developers: There will be minimal impact on large institutionalised entities with a solid brand and governance framework. Sales largely driven by the salaried class or investors with limited cash involvement would not suffer. Smaller developers are understandably concerned right now because many of them have depended on cash transactions.

We are likely to see a clean-up of non-serious entities due to this ‘surgical strike’ on the parallel economy. The impact of RERA, or the Real Estate (Regulation and Development) Act, will further discipline the industry, which will be good for its health in the long term. Other policies like the Benami Transactions Act will make the industry more transparent and the goods and service tax (GST) will reduce compliance costs.

Equity or debt investments: With demonetisation and RERA, the government has worked towards removing all major hindrances in the real estate sector for equity investors. While the real estate business has currently taken a step back due to these, it will set a strong foundation for long-term growth. Equity investments at such times can work extremely well for long-term investors.

With limited cash outflows allowed until completion of a project (thanks to RERA) and lower demand for properties (due to demonetisation and the Benami Transactions Act), developers will remain under pressure. Cash-flow generation will reduce further.

With limited scope for further leverage, developers will be open to providing good entry points to long-term equity investors.

While a few equity-related risks would continue, attractive entry points will provide a higher margin of safety. A few investors have already realised this and taken steps accordingly.

Anuj Puri, chairman and country head, JLL India.

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Published: 18 Dec 2016, 11:39 PM IST
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