Indian real estate investors sitting on the sidelines

The Indian real estate market is still reeling from demonetisation which has effectively smashed the cash market for property transactions. It may not be widely known but cash is more prevalent in Indian real estate transactions than the vast majority of other emerging markets. The withdrawal of the Rs.500 and Rs.1000 bills has taken out 86% of cash in circulation in India. There are signs that the change in policy by the new government is starting to have an impact on property prices and demand.

Large discounts expected

Many real estate agents in India are reporting a collapse in their trade since demonetisation. Indeed many are receiving regular calls from “professional investors” looking for significant discounts in light of the major changes. It will take time for the markets to respond to the recent move by the government but there are concerns that many real estate agents could go out of business in the meantime.

In the short to medium term property prices in some of India’s more affluent areas are expected to fall by up to 30%. This perfectly illustrates the massive number of cash transactions which have dominated the sector for many years. However, this could be a double edge sword because while property transactions and prices have fallen in the short term the government could receive a windfall in additional tax income from previously undeclared funds.

Short-term pain, long-term gain

While the overnight move by the Indian authorities took many by surprise it is in reality a case of short-term pain and long-term gain. The fact that the two bills withdrawn from the system accounted for a phenomenal 86% of bank notes in circulation gives an insight into the cash market. Even though the vast majority of those in possession of these two bills have already, or are in the process, converted them there are many investors afraid to make themselves known.

The Indian authorities have no definitive figures regarding undisclosed assets and potential tax evasion but it is known to be a substantial problem. We only need to look at the impact on property prices and in particular demand for property to see how much of a tremor this has caused.

When will markets recover?

Markets will find a level in the short to medium-term after taking account of recent changes although there are signs that “professional investors” are still waiting on the sidelines. If you had funds to invest in the Indian property market it would make sense to keep your powder dry and watch developments from a distance. There will come a time when markets have been “oversold” and there is value in the longer term but whether we have reached that moment is debatable.

It is interesting to see that the Indian authorities have given no indication that they will reduce the impact of recent demonetisation which shows great backbone and long-term thinking. There may be some short-term pain to follow, some markets will be hit harder than others, but in the long term this should increase confidence in the Indian real estate market. Would any other government have been as brave?

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