Demonetisation impact: A big blow for troubled realty sector

The real estate sector, which sees a lot of cash payments, has been hit hard by the Centre’s move to ban ₹500 and ₹1,000 notes.

In States such as Maharashtra, Karnataka, Tamil Nadu and Telangana, sales — particularly secondary ones — have been hit. But, there are some who believe this is a temporary setback and are confident that once the people sort out issues of either depositing or exchanging their high denomination currency notes, the market will pick up.

Some States have reported a nearly 40 per cent drop in registrations since the demonetisation was announced. Builders and land aggregators have stopped accepting or making cash payments.

According to N Ramaswamy, Inspector General of Registration and Controller of Stamps, Maharashtra, the State’s average daily income through property registration charges and stamp duty has fallen from ₹65 crore to ₹42 crore. The number of documents handled across the State has decreased from 7,300 to 4,000 a day.

A senior official in the Karnataka Department of Stamps & Registration said 1,500-1,800 real estate registrations were done every day in a normal period and this has fallen steeply to 200 a day now.

Where the demonetisation really hurts the real estate industry is in the weekly payments to construction workers, and to vendors and suppliers.

Contractors in some places have even resorted to buying provisions in bulk and handing them over to workers in construction sites so that at least they are not starved of food. Their weekly payments have been remitted into their bank accounts so that their families — most of the workers are from Bihar and Uttar Pradesh — can withdraw small amounts in their villages. However, the workers are not being given money in hand for their day-to-day expenses.

According to N Nandakumar, immediate past president of CREDAI, Tamil Nadu, organised players have been affected as wage disbursals to workers have been hit. But, sale of houses in the sub-₹1 crore segment has not been seriously impacted as buyers primarily depend on loans to cover 80 per cent of the cost.

But, for smaller developers and those in individual house construction, clearances have been delayed as there is substantial cash payment involved.

Striking a contrary note, a developer in Chennai said paper work and clearances have not been affected as the parties concerned have decided to settle payments once things return to normal.

P Dasarath Reddy, President, Telangana Real Estate Developers Association, said registrations have come down and payments are being made online or through cheques. The real impact is on land deals.

Anshul Jain, Managing Director - India, Cushman & Wakefield, said: “The Indian realty market, which is largely fragmented and unorganised, has had a reputation of being a safe haven for black money and therefore we expect to see impact on the sector. The impact is likely to be seen in the secondary markets for all asset classes, thereby making real estate more illiquid for a period of time till the market adjusts to a new normal.”

Ramesh Nair, COO, Business & International Director, JLL India, said the impact might only be in the secondary market, which typically involves some cash payment. Investors have long moved away from real estate as an investment category and the core property market is dominated by the salaried class, he added.

He further said registrations might dip in the short term, but will gradually improve as most things move online.

Registrations in most States have moved online, but payments are made in cash for levies such as service tax and VAT, especially in Maharashtra. “There is a slowdown in such activities,” said Manohar Parakh of MM Parakh and Associates, a chartered accountancy firm focused on real estate.

In the long term, said Deep Kantawala, Head, ICS Real Estate Partners, the demonetisation will be beneficial to the real estate sector as it will usher in transparency, because of which property registrations will go up.

In the short term, however, the banning of high denomination notes will affect liquidity in the system as builders, particularly small- and medium-sized ones, depend a lot on informal forms of funding. These developers will be under enormous pressure and their projects may get delayed.

( With inputs from our Mumbai, Hyderabad, Bengaluru and Chennai bureaus .)

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