Demonetisation to lead to transparency in future
In the medium to long term, demonetisation and measures such as the Real Estate Regulatory Act, GST and Benami Property Act should lead to greater maturity and transparency both in processes and valuation, along with price corrections. At the same time it is expected to remove developers and participants with questionable reputation and motives, positively impacting the sector, says an EY note encapsulating the impact of the ` 500 and ` 1000 note ban.
Construction: The construction sector is likely to be hit by demonetisation in the short run (less than three months) because a majority of labourers do not have adequate access to the banking system in the form of accounts, coupled with the fact that demonetisation has restricted the amount of cash that contractors can dispense to labourers. This could lead to delay in completion of projects, thereby putting pressure on the supply side.
Real estate: The impact of demonetisation on the real estate sector in the short run seems to be negative, which is evidenced by the fall in the NIFTY Realty Index by over 12% in the week of demonetisation. However, the impact of demonetisation on the sector needs to be understood in the context of the sub segments of the sector:
Residential: Over the past few years in most markets, the primary sale segment has been institutionalised through the use of banking finance by buyers to fund purchases, significantly lowering the cash component involved in the segment. Accordingly, the impact of demonetisation on this segment should be limited, especially in tier-1 markets and among large developers. However, there could be some negative impact in tier-2 and 3 cities and on smaller developers, where the cash component plays a role in primary transactions.
The secondary sales or resale segment, especially in investor markets such as the NCR and the western region, where the cash component of transaction is high, could be impacted negatively, leading to a significant drop in the number of transactions. Expect a price correction in such areas too. Commercial real estate: The cash component in the commercial real estate segment is minimal, as leases are well documented and institutionalised. Therefore, the impact of demonetisation per se should be minimal on this segment.
Retail real estate: Leases in the retail segment are typically a mix of minimum guarantee and revenue sharing. The retail real estate market can be bifurcated into luxury malls and mass retail malls. The luxury segment is likely to be affected negatively because of the high use of cash in the segment and hence there could be downward pressure on rentals in luxury segment malls.
Land sales/leasing: Land transactions in the form of joint ventures or joint development or through corporate divestments should be minimally affected by demonetiaation given that they are largely institutionalised and involve limited use of cash. However, direct land deals, especially those that comprise agricultural l and transactions, are likely to be impacted negatively and significantly by demonetisation. There is strong likelihood of a slowdown in such transactions along with price corrections.