Impact of demonetisation on NRI investments in Indian real estate

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Demonetisation of 500 and 1000 rupee notes is one of the most discussed topic these days. There are a lot of debates happening on its impact in the real estate sector which is believed to be the worst hit. There are major industries in India that thrive on a parallel economy funded by black money, especially the real estate sector. Demonetization is likely to have significant repercussions; importantly this effort will have a visible impact on how the current government's policies are perceived in international circles of economic power. However, it will affect the secondary market the most, where cash mechanisms have traditionally been a 'must' and the resale properties segment will take a big hit.

The purchasers who are on the verge of buying property are in double minds about whether to buy it or not along with NRI investors who also have a close eye on the Indian real estate sector. Large scale speculation about a serious drop in prices up to 25 percent is playing on the purchasers mind. The NRI real estate market in India, in the long run, will surely have a positive effect as all the real estate transactions would become more transparent. It will also have a decline in home prices in the luxury segment which has already been suffering due to very low demand over the last few years.

NRI homebuyers can expect property prices to come down in certain pockets, which would provide an opportunity for them to buy property in these areas. However, given the uncertainty and negative impact demonetization has caused on this market, individuals are likely to adopt a wait and watch approach and postpone their buying, which in turn would lead to further increase in inventory. This should result in developers reducing prices not only to offload inventory but also to drive sales. Another interesting effect of demonetization is that interest rates are expected to come down significantly for homebuyers, which in turn will minimize the cost of borrowing.

Demonetization has left a huge impact on the liquidity because majority of the currency value in circulation was withdrawn without replacing the bulk of it. Higher the time required for circulation of the notes, more will be the duration of the liquidity crunch. It is a great option for NRI investors since there is a better scope of negotiating prices currently in the real estate market. Rupee has also seen a steep decline of 4 percent since the announcement of demonetisation, thus increasing their buying power.

Series of reforms like RERA, Benami Transaction Act and demonetisation with a severe liquidity crunch will ensure that going forward; this sector will lose much of its historic taint and become more transparent. It will give a lot more confidence to the NRI buyers in terms of buying property in the Indian market. 

In the short-term, impact on the sector could be very serious, but in the long-term there are positive implications of the same. As a cleaning exercise, demonetization may yield several positive results for the economy. On another positive side, there is likely to be a reset of spending patterns as this move represents indirectly a significant push towards a cashless economy. We could see some appreciation of the domestic currency in the forex markets as notes in circulation will decrease. 

From a NRI perspective, I see a surge in demand for mid-income and affordable housing, especially with the thrust on this segment by the government through various schemes like the Pradhan Mantri Awas Yojana (PMAY) creating a huge demand with potentially higher scope for appreciation. Though in terms of luxury housing, it is currently not predictable and seems uncertain as most feel that the prices have peaked or are already overpriced and that was one of the major reason for the luxury real estate market to come to an almost standstill.  

Over all, the effect of demonetization on the NRI investors seems to be positive enough as it would lead to more transparency, cost reductions and more effectiveness in overall administration of the real estate sector. Internationally, the government is likely to get a thumbs up for the move and more countries could potentially see this as a viable option to curb black money and stem illegal financial activity. A huge influx of international sovereign wealth is accepted in the future with long term investment objective, thus stabilizing the realty markets. Having said this, there is definitely still an uncertainty in terms of how this liquidity crunch and demonetization will affect the major NRI investment in India. The country’s real estate sector will also depend a lot on the demand generated now.


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