The segment that is most hit by demonetisation is real estate. The residential property market, which was tottering and hoping for low interest rates and economic recovery for revival, is visibly shaken. And market participants see more gloom and doom, with any projected positives likely to play out only in the far future.
Sellers’ sorrow
Take the case of T Venugopal, a property investor who owns two flats on OMR, the IT corridor in the suburbs of Chennai. “The property was in the market all of last year, but I could not sell it. Buyers were extremely choosy about everything — features, location and facilities,” he says. The bid price was also lower than his expectation, he laments.
So, by August, he decided to let out the place, though the rent it fetched was low. “The tenants are a group of bachelors who work in the IT sector. I was hesitant, but in retrospect I am glad it is on rent instead of being locked up empty,” he says. Selling it now, after the demonetisation, would be even more difficult, he believes. The only positive he sees is that there may be a lower share of cash payment when the flat is sold in the future.
His fears may be justified as transaction volumes may be muted in the next three-to-six months. This is because buyers will expect prices to correct but owners may not be ready to acknowledge that. Renting out is not a profitable option for home owners as rental yields — the amount earned for investment made in a house — are dismally low at 2-3 per cent in most cities. Price appreciation was the primary reason for investing in a home, but with that likelihood all but wiped out and with many buyers preferring to wait and watch, the rental market may heat up.
Home owners can consider renting out and waiting, suggests Amit Kumar Agarwal, CEO of NoBroker, a property portal. “When people buy fewer houses, it positively impacts demand for rentals. Rental prices will continue to grow 8-12 per cent per annum,” he anticipates.
Lacklustre launches
Given muted expectations on transactions, new launches may also be down to a crawl.
As it is, the Real Estate Regulatory Act was expected to impact launches in 2017.
The muted pace could come to a standstill as developers focus on clearing their inventory.
The developers’ cup of woes is overflowing already. Liquidity issues have affected construction labour and contractors since their dealings are in cash, says Vineet Relia, Managing Director of SARE Homes. Liquidity issues will become sharper, especially for smaller, unorganised builders.
He adds that luxury developers will also face some hurdles since customers will defer high-ticket transactions.
“Given this scenario, we believe it makes sense to opt for more prefabricated modules or precast structures, where the impact of labour issues is minimal,” says Relia. He is optimistic that affordable housing developers and those dealing only with cheque payments will not be as badly affected.
Still, he feels secondary sales would have to grapple with a greater impact, compared with new unit sales. Rates in the secondary market are likely to come down more sharply, as the gap between circle rates and market rates is reduced.
One main reason for the higher impact on resale properties is the preponderance of cash in this segment. “In markets such as Delhi-NCR, where the black money component is supposed to be higher, the price dip could be to the tune of 25-30 per cent,” says Kanika Gupta Shori, COO and co-founder, Square Yards, a real estate advisory firm.
She adds that markets such as Bengaluru and Pune may be less impacted. Shori further believes that there may be a shift towards primary property purchase from good developers with a strong track record. “Buyers might prefer primary real estate as a platform for investment, rather than going after resale properties,” she opines.
However, happy may be the middle name for home buyers, who have been a harassed lot in the past.
Bullish buyers
K Venkatachalapathy, employed with a large auto manufacturer in Chennai, went ahead with a flat purchase recently.
“We liked a flat in a large new development by a prominent builder. The housing project had many features we favoured, including proximity to a school. Due to demonetisation, our housing loan approval was delayed. But the good news is that the home loan interest rate ended up being lower,” he says.
“Not only that, there was no crowd at the registration office,” he adds gleefully.
Developers are also trying to woo buyers with attractive schemes. “Some developers have changed their subvention scheme and are not demanding any payment till possession. Similarly, some developers are ensuring that in case there is a price shift in the market, the property prices will be revised accordingly,” says Shori.
“Buyers stand to benefit from higher transparency, fair pricing and lower rates. The gap between primary and secondary rates, too, is bound to get reduced. In the long term, transparent norms and better pricing will reduce the trust deficit between builders and buyers,” says Relia. “The builder we bought from is honest; over 10 flats were sold just in the month of December. Buyers are interested in good projects, if they see value,” says Venkatachalapathy. He plans to move into the flat with family and so he is not worried about price appreciation.
Agarwal of NoBroker agrees on the long-term view. “If you want to buy for end usage, do not worry about short-term developments. If you like a property and want to stay there for the next 5-10 years, we will suggest that you negotiate a bit and close the transaction,” he advises.
For property investors, he recommends keeping an eye on deals. “If there is a good deal that comes your way due to an owner or builder wanting to raise money due to time pressure, then the investor should take it up,” he suggests.
(The article first appeared in The Hindu BusinessLine.)