Demonetisation: Organised Real Estate Players To Benefit In The Long Run

As with any significant policy shift, the Government's recent demonetisation of higher currency notes has sparked a debate over its impact on the Indian economy. This step is one of the most forward-looking and transformational reforms undertaken by Prime Minister Modi. It might take few weeks for people to adjust to the new currency reforms and liquidity scenario, leading to short term hurdles in economic growth. However this will be more than outweighed by the long term positives for the economy.

Targeted towards reducing the unaccounted money in the system, this step will significantly improve transparency in the sector and thereby push growth to an upward trajectory. The step will be well supported by other recent reforms undertaken by the Government in the real estate sector like Real Estate Regulation Act (RERA), GST, REITs and reforms related to FDI. Organized players and reputed brands are already complying with all these regulations and hence will not be impacted by the move. The new currency provisions along with the other regulatory reforms will instill more confidence in the minds of home buyers with regards to fair transactions and on-time execution in the sector thus leading to sustainable growth. Moreover, with greater transparency and better corporate governance, the real estate sector will see a huge inflow of foreign capital via private equity and REITs.

With higher denomination currencies contributing to almost 85% of our total US$250bn currency in circulation, banks are likely to see an upsurge in deposits. This increased liquidity may lead to home loan rates being reduced to 7-8% (as FD rates fall to the 5% range). These levels have historically seen a sharp increase in real estate demand as not only are the EMIs for consumers lower, but also the price appreciation offered by real estate becomes distinctly more attractive than returns on bank deposits.

It is also worth noting that the penetration of India's banking system will increase at an exponential pace. Money will flow in from the large unbanked sections of society like the SME sector, farmers, small traders, unorganized retailers, contractors, daily wage earners and so on. This opens up incredible opportunities for the common man to avail loans and buy their dream homes.

The government will significantly benefit from the increased tax compliance and will be better positioned to fund its infrastructure reforms like Housing for all, Smart City mission and better transportation infrastructure. Improving infrastructure, new airports, new highways, more metros - all these factors lead to increasing demand and prices of real estate in a city.

India's real estate industry mainly caters to the primary market where end-users typically avail home loans while buying a residence. The economy will benefit from reduction of unaccounted money, higher tax collection, increased government spend on infrastructure, better business environment and more transparency. In fact over the long term Real Estate will further solidify its position as one of the most consistently performing asset classes providing value both in use and investment.