Commercial Real Estate To Be Unfazed By The Aftershocks Of Demonetization.
There is still a lot of haze remaining from the recent demonetization move by the Central Government. And this cloud of uncertainty has surely shaken up every business segment in the country to some extent. Since real estate has always been a traditionally and politically controversial sector, with greater incidence of corruption and high-end cash transactions, it is very likely to come across many hitches. Smaller commercial businesses and resale wings of the real estate industry, which are primarily controlled by small-time realty firms and investors, rather than by end-users, are still reeling. Even though this situation is expected to turn around soon, developers are likely to face cash flow problems due to the abrupt curb on the common practice of deploying excess cash into commercial real estate. This will not only affect their working capital requirements but may also expected to put pressure on prices.
Slowdown in the market
The demonetization move has caused consumers to be more cautious about their investments, which has resulted in a sudden fall in demand for real estate space. This is, however, clearly a short-term effect. The slowdown is more apparent in the National Capital Region (NCR), Gurgaon, Mumbai, and some Tier-II cities such as Vadodara and Surat, while end-user driven markets such as Bengaluru, Chennai, and Pune have not been affected much. The growth of commercial real estate in Tier-II and III cities has been impacted mainly due to a greater cash component driven by local businesses and the unorganized market players. These cities will, however, soon put a stronger digital infrastructure in place to bridge this disparity between them and bigger metros.
Transactions involving cash components would be worst hit, with some delay in completion of ongoing commercial projects. Small businesses are the worst hit as they basically run on cash-based dealings. They will find it harder to receive payments for services, and for building an inventory and merchandise base. Even though there is involvement of cash during the initial phases of commercial property development, a bulk of the process is transacted through white money. Therefore, the overall big picture in the commercial realty segment is predicted to see minimum impact, especially on the office and industrial leasing and transactions front, as cash components are not significant here. Large institutionalized commercial developers have a solid brand image and a strong governance framework in place, and therefore, will not be bothered much by this move.
Inflation is expected to come down in the next few months with key monetary policy moves such as repo rate cut being brought in by the RBI. With the cash component being expelled out of commercial real estate, land pricing will stand corrected, along with other impacts like enhanced transparency in transactions, revised trust among consumers, and fresh rounds of cash inflows in the commercial realty sector. Projects, even though may suffer initial delays, as informal inflows of funds may not be received, this is directly going to bring in more of institutional capital and FDI due to greater transparency in the market. Banks would find the market more attractive and would be more ready than ever before to fund projects.
The wider impact
With more policy reforms coming into place in the form of the Real Estate Regulation and Development Act, 2016 (RERA) and amendments to the Benami Transactions Act, the real estate sector as a whole is moving out of its cloudy past towards more clarity. It is going to be the survival of those businesses, which run within a framework of integrity, with benefits being passed down to the end-users. On a long-term note, the Indian real estate is moving towards a healthier, stronger, cleaner, and more sustainable system.