Indian Real Estate: Taking The ‘Demon’ Out
of Demonetisation
By Ashwinder Raj Singh, JLL India
Demonetisation - the most-repeated word
used by an entire nation in the current times. Since 8thNovember
2016, the day PM Modi announced this revolutionary step affecting India’s
economy, demonetisation has dominated every conversation and been connected
with everything wrong happening in our economy.
The purpose of the entire
exercise was to clean up the system, and that is how it invariably got
connected with real estate.
However, it is less pertinent to debate
about the connection between demonetisation and real estate than to clear a lot
of myths surrounding the realty sector.
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| Ashwinder Raj Singh, JLL India |
It is high time to tame the wild
rumours and uniformed angst about the impact of demonetisation - and other
macro-economic and policy changes in 2016 - on the Indian real estate sector.
Let’s have a bird’s eye view of the entire
market:
Pre-demonetisation:
The Indian real estate sector has been
facing significant challenges in the past few years when it comes to sales and
overall growth. With a lot of measures, the sector was clearly pointing towards
a slow and gradual, but sure recovery.
· Sales
& Prices:
After stagnating or even declining sales for past couple
of years, the 1st half of the year saw some upward movement on
the back of many positive factors. Prominent among these were the overall
growth in the Indian economy, attractive deals and discounts being offered by
developers, and the high potential of schemes such as Smart Cities, AMRUT and
Housing for All by 2020 initiated by the Government.
The positivity these
factors induced, coupled with increasing incomes and lowering of prices, encouraged
buyers to begin finalising deals that were previously put on hold. Importantly,
it was not only investors but also end-users who started coming back in the
market.
· Unsold
Inventory:
Except for a few pockets in Delhi-NCR, most of the prominent
real estate markets - including some NCR micro-markets - saw a gradual decline
in the unsold inventories that had been choking up liquidity for builders. One
of the reasons was the residential market being flooded with projects that were
expensive, against the demand for more affordable ones - in simple terms, a
classic supply-demand mismatch.
To liquidate their holdings and ensure
financial stability, developers became amenable to negotiating more and
offering attractive deals. They also tied up with financial institutions to
offer affordable loans, and announced other schemes to help buyers take
decisions. This had started paying off.
· New
Launches: New launches reduced markedly in the current FY 2016-17,
owing to higher unsold inventory; this means the developers were focusing their
resources on disposing off the developed projects. Also, catering to the demand
of affordable housing, new launches started focusing on that segment instead of
catering to the high-end residential sector.
Post-demonetisation:
Owing to its uniqueness as an economic
event, demonetisation brought a lot of confusion, uncertainty – and, most of
all, rumour-mongering - especially when it came to the realty sector. No doubt,
everyone was affected by this radical measure, and initially all possible
economic activities slowed down to a large extent.
However, the dust soon
settled and economicactivity resumed. Unfortunately, this quick return to
relative stability is not something that has been adequately captured by the
more disaster-focused media channels.
Every critic and observer took the easy
way out to describe this event as the death of the real estate sector as we
know it. Obituaries were written, the market was more or less written off,
builders were expected to shut shop and prices were seen as headed for a
terminal nose-dive into next to nothing. Such was the vision of untrained eyes’
imaginations.
This is not to say that the real estate
sector has not been affected by the demonetisation move; however, it is
important to understand where the pinch really lies, and where the silver
lining is. The Indian real estate sector contributes 5-6% of the country’s GDP,
and any misinformation in a sector that is largely sentiment-driven can lead to
chaos.
To get a clear picture, let us examine how
demonetisation affected the residential market:
· Secondary
Market:
This market definitely got affected, considering the
structure of the deals involved often take here. With scarcity of cash, a large
corpus of buyers went off the market and sellers can do little but wait.
This
will also result in the reduction of prices, thereby benefitting buyers.
However, the pricing reduction might take time - and the magnitude of reduction
cannot be predicted at this stage.
· Primary
Market:
This is the area that has been overlooked and bundled with the
rest of the real estate sector. The rumoured decline in this segment is very
far from reality, because the primary market - consisting of ready-to-move
homes and new projects – caters to end-users whose primary sources of funding
are banks and other financial institutions.
Simply put, it is home loans which
finance the purchase of such properties, so this segment is effectively
insulated from the currency ban. It was not expected to be affected, and in
fact was not – other than in terms of the initial confusion-induced decline in
sentiment. The trend emerging now points towards a recovery in buying
sentiment, with serious buyers already returning to the primary markets.
This positive development is adequately
illustrated by the performance of the JLL Residential (JLLR) division, which
has had a phenomenal year and doubled its profits in 2016 over 2014-15 with 60%
revenue growth.
Such a performance in what has been one of the toughest phases for
the real estate sector in more than a decade could not have happened in a
declining market environment.
Above all else, these readings vouchsafe
the faith that buyers have in developers with credible reputations. Real estate
developers with transparent business practices have not been affected by
demonetisation, and have instead witnessed sales growth.
Such Grade A
developers continue to launch new projects, partnering with corporatized
consultancies to market them ethically to a highly responsive end-user
clientele.
The fact is, demonetisation has already
resulted in a major reduction of home loan rate interest rates, and they are
expected to reduce further. Developers offering good deals and discounts are
maintaining their position in a market which is now ideal for serious
end-users.
About the author...
Mr. Ashwinder Raj Singh, CEO – Residential Services, JLL India
For media contact
Arun
Chitnis
Head –
Corporate Communications & Media Relations
JLL
India
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