India to replace largest bank notes: A game changer for the real estate industry

The move by the Government of India to replace the INR 500 and INR 1,000 currency notes will be beneficial for the real estate sector in the long run.

The recent decision by the Government of India to scrap INR 500 and INR 1,000 bank notes and replace them with a new series of notes in denominations of INR 500 and INR 2,000 is unprecedented. While the broad motive of the Government of India behind this move is to curb the menace of fake currency notes and abolishing unaccounted money, the impact of this move can be felt across the economy. The real estate sector is no different and this move will have far reaching effects for the realty sector as well. We can broadly gauge the impact of this move at two levels—the long term effects and those in the short term.

The larger canvas

The broader effects of this move will help the sector grow in the long run. Firstly, it will create a level playing field amongst all stakeholders in the sector. Coupled with legislations like RERA, GST bill and Benami Act, this move by the government was much needed. This will further increase transparency in the sector. We foresee higher volumes of FDI coming in at competitive rates. Institutional funding to developers which till present day came with a high risk weightage is bound to see some softening. Prices coming down to reasonable levels in the residential property market cannot be ruled out.

The short term effect

While the broader impact of this move will further boost the growth of the sector in the long run, we foresee serious repercussions in the immediate future. There will be a substantial downward pressure on the volume, number of transactions and prices in both residential and land markets. This move will not have as much of a bearing on larger corporate players as it will have on others. The impact will be felt across the board with tier-II and tier-III markets taking a larger hit.

The way ahead

We do not expect much traction to happen in the remaining part of this financial year. Any green shoots of recovery that were there in this sector will lie low, at least for this fiscal. In FY 2017-18 however, the market will discover a new normal in volume and price.

With RERA, GST, Benami Act and this recent move proving to be a game changer, next year this time, the real estate sector will be a totally different industry – a more evolved, transparent and a corporatized one!

For more information please contact Shishir Baijal, Chairman & Managing Director, Knight Frank India or Sukanya Chakraborty, Director – Corporate Marketing & Communications.

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