How the removal of a major chunk of cash from the Indian economy could spell good news for the real estate industry. Prices could dip in the short term, but strong demand for realty will help it revive in the long term.
Prime Minister Narendra Modi’s recent decision to demonetise the existing notes of Rs 500 and Rs 1000 denomination has changed the sentiment across the country. The country is under the impression that the real estate sector, among a few others, could be hit the hardest.
If the sentiment for the real estate sector after the announcement is any indicator, it has certainly slipped a few notches after the announcement. The common perception is that all real estate companies deal with a lot of cash and hence, they could be hit hard.
That, fortunately for the industry, is far from the truth. A large part of the real estate industry is welcoming the steps taken by the Prime Minister because it helps cleanse the system like never before. It is the secondary market deals that sometimes involve cash because of the difference in prices between the market and that of the circle rate in the place where the transaction is happening.
With the cash component disappearing from the market, the general belief is that there could be a decline in real estate prices across the country. Given the demand situation and the consistent rise in input prices for real estate companies, only the change in sentiment could drive the dip in prices. But when the market revives, the tectonic shift will ensure that cash will be nearly completely out of favour.
Favourable government policies
The writing has been clearly on the wall and if there are companies which could not see it coming, it was going to be at their own peril. Several legislations over the last few years have slowly brought about a fundamental change in the real estate sector. The Benami Transactions (Prohibition) Amendment Act, 2016, now empowers the government to take action against the ‘benami’ properties. Real Estate Regulation Act (RERA) aims to set up a regulator in the states which will ensure the smooth functioning of the sector and also protect the rights of the consumers.
The policy change by India’s market regulator Securities and Exchange Board of India (SEBI) that has enabled Real Estate Investment Trusts (REITs) to invest in the Indian market will promote good quality, long term capital investments in robust commercial and other real estate assets in the Indian market. Since these trusts will be listed on the stock exchange, it is expected that under SEBI’s regulatory lens, the capital being invested into the sector will make it transparent for shareholders. The introduction of Goods and Services Tax (GST), expected to begin from April 1, 2017, is expected to raise the bar further for transparency in the real estate sector.
There is indeed a small section of the industry which, covertly and overtly, has been opposed to the cleansing of the system. It may suit some of them to get their work done by using cash and other means. Generally, the smaller, fringe players have generally been averse to these progressive legislations but companies with a long term vision have liked the idea of more transparency being brought into the sector.
Rise in global investments
The ambition of some companies to scale up and expand their operations has caught the attention of global investors. The sweeping change and transparency being brought into the system have added more fuel to the changes that are happening. Look at some of the major deals in the recent months which are indicative of the flood of capital that can be expected soon.
Blackstone has been one of the aggressive investors in India’s real estate companies for some years now, choosing to bet on companies in Pune, Mumbai and Bangalore even before the recent legislations came into effect. Xander has teamed up with Dutch pension fund manager APG Asset Management to deploy $1 billion in India. The pace of more such deals could be expected to pick up from companies which are process driven and have the hunger to ramp up their operations.
Right time for buyers
For the housing market, the dip in prices in the secondary market could be a good buying opportunity, just as global financial crisis presented and unprecedented opportunity to invest in efficiently run real estate companies. A fire sale for some companies may not be ruled out but the smart investor could look to buy a house with the best companies since a good deal could be on the table.
Real estate has strong linkages with nearly 250 other industries. Its long value chain could also see the impact of the pain that the sector will undergo. But once companies go through the pain, those with robust processes will emerge stronger.
In the marketplace, the sentiment can change anytime. But the fundamentals and capital flow can keep any industry going. India’s real estate industry is lucky that the latter two are giving it strong company. The sentiment will, perhaps, now take a little time to change but, not quite apparent to most of the people is the good news that this change may already have been set in motion. The real estate wheel is ready to come a full circle.
