Indian real estate impacted by monetary change

In a surprise move the Indian government this week announced that the country’s two highest denominated banknotes will cease to be legal tender. Bearers of the Rs1000 and Rs500 notes have been instructed to visit their nearest banks to deposit or convert them. This may seem like a minimal change to the Indian banking system but the repercussions are likely to be felt right across the investment spectrum, including the real estate market.

Luxury real estate

Some so-called experts believe that properties towards the luxury end of the Indian real estate market could fall by as much as 25% in light of the change in banknote denominations. The theory is that many investors are holding funds in cash which have not been declared to the authorities or indeed may be from the “black market”. Historically money-laundering gangs have targeted the real estate sector because it is possible to pay in cash and effectively introduce “dirty money” into the system.

The very fact that money-laundering and undeclared funds are an extremely secretive area of life means that any estimates are purely guesswork. However, we will likely see the impact in the short to medium term with an array of cash purchases expected to be cancelled or put on hold.

Is money-laundering a problem in India?

It would be unfair to suggest that money-laundering is any more of a problem in India than it is in any other country around the world. Even the likes of the UK, with some of the strongest regulations in the world, are still struggling to contain the use of illicit funds in the property market. Indeed there was a suggestion that undeclared or illicit funds make up a substantial part of the London real estate market. So, while the move by the Indian authorities was certainly unexpected it is probably a wise move in the longer term.

Over the last few days we have seen massive queues at Indian banks as holders of the previously legal tender notes look to deposit or exchange them. There are murmurings that the real estate sector is already beginning to struggle but such is the impact on the overall economy that many shops have been forced to turn customers away. It will be interesting to see whether the Indian authorities soften the blow a little in the short to medium term because this move seems to be impacting legitimate businesses more than any other group.

Will financial instruments become more popular?

While it is unfair to suggest that all funds held in cash are illicit or undeclared this is certainly the target of the change in banknote denominations. Like many countries around the world India has a strong cash economy and many people feel safer holding cash rather than using bank accounts. However, if the authorities can change the denomination of bank notes overnight this could prompt a growing number to look towards legitimate financial instruments to hold their wealth.

At the moment it is only guesswork as to what kind of impact this change will have on the real estate market, and the economy as a whole, but it will have an impact.

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