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Impact of Demonetization on Commercial Real Estate Sector 2016

Posted by cres on 24th November 2016
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The government’s recent move to demonetize Rs 500 and Rs 1,000 notes will impact mainly the real estate sector. This includes the resale market, commercial business and some pockets in the primary market largely driven by small developers, investors rather than end-users who prefer to deploy excess cash in buying commercial office spaces, apartments or land. This pain, however, won’t last long. The cash flow problems some developers are likely to face will affect their working capital needs and also put pressure on property prices.

Impact on small businesses and large businesses

Over the next month, there will undoubtedly be a significant shortage in cash supply: not just Rs 500 and Rs 1,000 debt, which are being taken out of circulation, but almost every other denomination as well.

Multiple experts and government administrators, however, have told The Wire that this process can probably take one to two weeks in urban and semi-urban areas and up to a month in remote and rural regions. In the meantime, long queues at ATM have already started. People are withdrawing small amount to stock up, so there will be scarcity in the days and weeks ahead.

Small businesses, both in urban and rural areas, will find this move downright crippling in the short-term. These businesses are principally run on cash: they use hard cash to receive payments for services and to create payments for inventory and merchandise. It’s unclear at the moment how rapidly they will be given access to the new Rs 2,000 and Rs 500 notes that will be issued.

On the other hand, as analysts have noted, India’s larger and new-age companies will have no problems in making the switch to Rs 2,000 notes. Plotted development may see prices’ crashing by almost 30% as the cash component in such properties and commercial properties is much higher.

Traditional sectors, such as real estate are politically controversial and where there is larger incidence of corruption and high-value cash transactions, will likely go through a tremendous amount of pain, chaos and restructuring in the next few weeks.

Let’s look at how the major real estate segments will fare,

Commercial Real Estate:

There will be a minimal impact on office/industrial leasing and transactions business; as long as cash components do not play a significant role in such form of transactions.

Real Estate Investment Markets:

Projects might get stretched as informal sources of capital may not be offered. This, in fact, spells additional opportunities for institutional capital. FDI, private equity and debt players will suddenly notice the market even more transparent and attractive.

Retail real estate:

Retailers may see some impact on their business within the short-to-medium term as a result of reduced cash transactions. The luxury segment is likely to be hit because of the traditionally high incidence of black money acceptance during this segment. However, credit/debit cards and e-Wallets ought to return to the rescue. Overall, the domestic consumption story remains intact, with no threat to the general strength and growth of the Indian retail business.

Land sales and leasing:

Where land transactions are happening within the realm of joint ventures, joint development or facilitating company divestments, can see little impact of the demonetization move. This is because as a result of corporate divestments unit are all quite institutionalized, with little or no money involvement. However, those carrying out direct land deals can doubtlessly suffer particularly once it involves agricultural land transactions that tend to involve significant cash involvement.

Commercial Real estate Industry Experts reacts on Demonetization

  • Anshuman Magazine, Chairman, India & South East Asia, CBRE
    It is a bold move. While it may cause some pain in the short-term, the long-term outlook for the industry looks positive. It certainly helps that the real estate industry has already moved towards transparency in its operations. Several steps taken by the Government in recent times—from the RERA Act and GST, to REIT—combined with this announcement, will further improve transparency and increase investor confidence in the real estate market in the long run.
  • Neeraj Gulati, Managing Director – Assotech Realty (P) Ltd
    It is a powerful tool to curb unaccounted money and corruption. It is a great welcome initiative which will help country and countryman in longer terms. End user in real estate will get benefit.
  • Anuj Puri, Chairman & Country Head, JLL India
    The ban on higher currency notes is a major move which will help curb accounted for cash in the real estate sector. We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry. The effects will be far-reaching and immediate, and shake up the sector in no uncertain way. Stricter measures against black money have for long been required to help bring about greater transparency, give the Indian real estate sector more credibility and make it more attractive for foreign investors. Black money deals are more common on the unorganized market, but this practice has, in fact, been on the decrease with greater awareness on the part of buyers. Before too long, the caricatured version of black money driving Indian real estate is no longer applicable.
  • Amit Parekh, a broker active in Noida
    For commercial properties worth Rs 1.25 crore, the cash component is usually Rs 50 lakh. Due to demonetization of Rs 500 and Rs 1000 notes, this segment may see a correction of 25% to 30%.

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