In ICRA’s view, the recent move by the Government of India to ban the legal tender character of the high denominated bank notes of Rs 500 and Rs 1000 issued by Reserve Bank of India (RBI) from the midnight of November 08, 2016 will lead to a paradigm shift in the way business operations are conducted in the real estate sector.
The prevalence of usage of unaccounted cash in the unorganised real estate market will be directly impacted causing further slowdown in the demand for the sector that has already been facing headwinds for long. Such a ban will lead to deferment of purchase by the buyers of real estate in the near term on account of expectation of price correction, thus, leading to further slowdown in sales velocity. The expectation of price reduction emanates from the belief that the current action will marginalise the buyer segment where usage of unaccounted cash was prevalent. According to ICRA, the prices of real estate which had increased sharply in the last decade and become unaffordable are expected to show signs of correction in the secondary market to start with over the short term. Correspondingly, correction in prices and increase in transparency levels will help bolster the buyer’s confidence to revisit their purchase decision.
Moreover, correction in secondary markets will have a bearing on the primary markets as well where ICRA expects the real estate developers to align the prices corresponding to the prevalent market dynamics. Recalibration of prices by the developers may help to support the demand to some extent; however the move is expected to impact their profitability and cashflows in the short to medium term.
According to Shubham Jain, Vice President, ICRA, “Government of India’s move to ban the high denominated currency notes of Rs 500 and Rs 1000 and replacement of the same with the new notes is in line with the Government’s efforts to curb black money. In the short term, it will be challenging for all the stakeholders as the government’s action has triggered a paradigm shift in the way the industry operates. Immediately, the move is expected to slow down the demand further and result in price correction across various product segments, especially premium to luxury segment.
Over the long term we expect the sector to benefit from the Government’s action. The current action to curb black money and notification of RERA across States should bring in transparency and credibility in the sector as well as confidence of stakeholders like customers, foreign investors amongst others associated with the sector.”
Government of India had earlier undertaken various measures to curb the use of black money such as amending Benami Transaction Act, implementation of the recently concluded Income Disclosure Scheme 2016 amongst others. The actions being undertaken by the Government along with notification of RERA should lead to better transparency and corporate governance standards in the real estate sector than what the market got used to hitherto. Consequently, ICRA expects this to improve the funding availability, including the foreign investments as well as boost demand over the longer run.
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