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Real Estate : Where to from Here?
Thu, 17 Nov Pre-Open

The only constant, they say, is change. And what better proof of this age-old adage than the last few days. The demonetisation of Rs 500 and Rs 1,000 notes has changed the way in which a large part of the Indian economy used to transact. The change is seen as a short term pain, but a long-term value gain for the Indian economy.

There is some short term pain witnessed across various stock market sectors. The worst affected here is the real estate sector. The reasons are obvious. Real estate industry in India has one of the highest proportion of black money involved. With the recent demonetisation move which is primarily aimed at cracking down the flow of black money, the real estate sector has felt most of the brunt.

There are a lot of things that has led to the above fall.

First is the cancellation of real estate deals. Many real estate deals have gone for a toss. Buyers who meant to close their deals with the cash component are now willing to rather wait. Also, hopes that real estate prices may fall in the near future has led to a slowdown in real estate deals.

Second is the fear that the real estate companies will default on their loans, if prices fall. This belief has led to a fall in the stock price of real estate companies that have huge exposure to banks for their financial needs.

Further, there is also seen an impact on the demand for real estate. As per an article in the Economic Times, enquiries from brokerage firms across India have dropped by at least 20% in the past week. This is seen as brokers fear that sales of residential flats may fall by around 40% due to the demonetisation drive.

However, the above pain in the real estate sector is meant for good. As Tanushree Banerjee, co-head of research at Equitymaster, recently wrote:

  • Scrapping the Rs 500 and Rs 1,000 notes is not just a war on black money. It is a war on real estate prices as well. The asset class has been due for correction for long. But black money, which has been the panacea for the sector, allowed realty companies to revel in the froth. The resulting bubble had a cascading impact on home loans as well.

    In fact, our colleague Vivek Kaul, explained in the latest issue of Vivek Kaul Letter how the banks are hand in glove with realty companies to keep the bubble bloating. Bank loans to commercial real estate moved up from Rs 75 billion to nearly a trillion rupees in the past six years.

In all, the demonetisation drive will lead to transparency in real estate transactions. Also, the move is likely to bring down real estate prices and boost demand. This may mean pain for realty companies and some banks and NBFCs in the near term. However, eventually we expect this move to be a big positive for the people as well as for the Indian economy.

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