|07 December, 2016

Demonetization: Indian property needs a heavy dose of expat buying

Domestic Indian buyers may no longer have an appetite to commit sizeable investments

Image used for illustrative purpose. A worker at a fuel station checks a 500 Indian rupee note after filing a vehicle with fuel in Kolkata February 3, 2011.

Image used for illustrative purpose. A worker at a fuel station checks a 500 Indian rupee note after filing a vehicle with fuel in Kolkata February 3, 2011.

REUTERS/Rupak De Chowdhuri

Wednesday, Dec 07, 2016

Dubai: India’s residential property market will need all the help it can get from expatriate Indians in the first few months of 2017 — without their funds coming in, it could be in for a steep decline. The Indian government’s decision to go in for a demonetisation programme on November 8 could have its biggest — and longer lasting — impact on real estate, even if the availability of fresh notes reaches normal levels before the month, as has been promised by the authorities.

Domestic Indian buyers may no longer have an appetite to commit sizeable investments, and more so when anything out of the ordinary is under constant scrutiny by tax officials. And then there are the persistent rumours that the government will next turn its attention on illegal funds already committed into property investments.

Even without the demonetisation announcement, “across cities, the real estate market was not looking at the fourth quarter to be the best in recent years”, said Anuj Puri, chairman and country head at JLL India consultancy. “The festive season did not help lift sentiment and sales’ momentum across most cities continue to remain slow.

“The next three to four months would see sales happening at a slower pace due to the demonetisation move, more so in markets where smaller traders and businessmen are home buyers. Markets where the salaried class is the main chunk would not see a high impact.

“Secondary sales, which tend to feature quite a bit of cash component, will be impacted, but primary will not see much impact. Tier-II and III cities will see a higher impact from the demonetisation exercise than Tier-I, as many developers in the latter already follow corporate governance and transparent ways of doing business.”

Developers will react by slowing down on new launches and trying to sell through their inventory. The number of launches across seven major cities in Q3-16 was the lowest in three years, JLL reckons. Both demand and supply are expected to come down in the next three to four months.

“Overall, 2016 will end up as the weakest in terms of new launches, only better than Q3-08, which was the historic low,” said Puri. “We did anticipate sales to start picking up from Q4-16 — demonetisation has put that anticipation to rest in the interim. More than end users, it (affects) investors who participate during pre-launches.” Demonetisation has made the investment scenario a bit uncertain.

“A lower number of launches will, however, prove to be good as far as reducing overall inventory levels are concerned.”

It also means that Indian developers will double down on their marketing efforts aimed at non-resident Indians in the Gulf as well as the Indian diaspora elsewhere in the world. They will be their favoured go-to investors in times of extreme stress. Incentives could be sweetened further as developers outbid the competition to get these buyers to sign up.

Some of the activity will be triggered at the latest Indian Property Show opening in Dubai on Thursday and organised by Sumansa Exhibitions. Also, some developers are thinking that the worst of the demonetisation fallout would have been ironed out of the system by mid-2017.

“More people have been depositing their monies in banks post the demonetisation announcement, which means they will be eligible for home loans,” said Dharmesh Shah,

Vice-president and head, Residential Sales & Marketing at Adani Realty, said, “With reduced home loan rates, demand for housing is to increase and this will drive the pricing factor.

“Demonetisation will also lower interest rates on deposits ... earnings are expected to be in the range of 5—6 per cent on deposits in the short to medium term. This will lead to better RoI (return on investments) from real estate investments in the long term apart from getting tax benefits on home loans.”

But in the short term, the concerns are very much there that developers — or a good number of them — will be forced to cut prices to ensure a transaction takes place. That will trigger counter moves by others and — taken to extremes — erode margins. Moreover, Indian real estate has gone through an exceptionally tough two years and — before demonetisation — was placing high hopes on 2017 ushering in a full-scale recovery.

But, Srinivasan Gopalan, group CEO at Ozone, says this too will be taken in stride. “There will be some minor jerks across micro — markets ... but nothing that will impact the fundamentals. With cost of raw materials and skilled labour on the rise, there will always be a pressure on pricing. Therefore, there is no scope of any price reduction by Grade A developers in metros with a track record of construction and delivery.

“I am of the view that the anxiety on looking to buy a home will die down in a few weeks. By which time, hopefully, home loan rates along with saving and fixed deposit rates would have come down, making investing in a home more attractive.”

Over the recent past, only Kolkata and Pune have seen a higher rise in capital values than the pan-India average increase, according to JLL. Cities with heavy speculative buying like Delhi-NCR will “slip, while those with strong end-user driven demand like Chennai and Pune may continue to hold their momentum”.

At some point, domestic buyers will get comfortable in a post-demonetisation world and start coming back into the market. “Investors find property more attractive than earning a paltry 5-6 per cent on bank deposit as buying and renting out gives them more returns,” said Rajeev Ajmera, managing director of Prime Lifespaces.

“Plus, they create an asset and earn appreciation over a period of time and they get income tax deductions. If interest rates on a fixed deposit is just 5-6 per cent, interest on home loans will come down to 7-8 per cent after the demonetisation drive.

“Real estate investment is the best from a long term angle as taxation happens only on sale and in case of reinvestment 100 per cent tax can be saved.”

For the moment, India’s developers are hoping that their short-term worries remain strictly limited.

By Manoj Nair Associate Editor

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