Buyers hope to get more discounts
The construction sector is likely to be hit by demonetisation in the short run 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, says a Ernst and Young note encapsulating the impact of demonetisation on the real estate and construction sector.
This could lead to delay in completion of projects, thereby putting pressure on the supply side.
As far as the commercial real estate sector is concerned, 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. However, it could be impacted by other factors such as US election results and the resulting impact on outsourcing, as well as the reduction in supply due to construction-related delays.
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, says the note. End users are expecting discounts and hoping that white money has more currency in the current scenario. Decisionmaking may be slow, but actual users are still around, say real estate experts.
Khushru Jijina, managing d i r e c t o r, P i r a m a l F u n d Management, believes that in the near term, demonetisation is likely to further impact an already muted buyer sentiment across most major markets. This is likely to be reflected across both velocity and pricing, albeit in a more limited way for Tier -1 cities and end-user affordable housing when compared to the smaller towns and cities and the luxury segment.
“However, we believe that the medium to long term impact of demonetisation is largely positive especially for the end-user and for financial investors such as ourselves. We have already seen this trend reflected in the immediate aftermath of demonetisation even as sales of well planned, well executed and well- priced residential units continue to take place. Coupled with RERA, this actually fast tracks the ‘institutionalisation’ of a sector that has already been consolidating. Given the immediate impact on sentiment, markets will likely normalise over a three to six month period as we believe that Tier-1 developers and those who already embraced investment grade processes and governance standards will emerge stronger and the average/smaller/speculative developers will be forced to consolidate quicker than otherwise expected.”
The market is in reset mode and demonetisation is only going to transform it into an efficient end-user market. Post demonetisation, there have been cases of some developers escalating prices and accepting some portion of the payment in cash. “Most cancellations have been from investors who are now desperate to get out of deals signed earlier. As many as 35% are cancelling deals signed earlier in cases where the cash element deployed was huge, especially i n case of plotted developments and r e s a l e p r o p e r t i e s , ” s ay s Pankaj Kapoor of Liases Foras.