With demonetization likely to have a major impact on cash transactions, the Indian real estate market may become more attractive to foreign investors, who are willing to bet long-term

The demonetization of Rs 500 and Rs 1,000 notes, is likely to result in an immediate reduction in cash transactions, in the real estate sector. Buyers are expected to shift towards more legitimate transactions, thus, having a structural impact over a period of time. Liquidity will contract over the short-term and prices will become more attractive. Investors will have fewer opportunities, for short-term gains.

Initiatives to attract foreign investors to Indian reality

Demonetization is the latest in a series of moves taken by the government in the last few years. The others include the introduction of the Real Estate Regulatory Act (RERA), improving the policy framework for real estate investment trust (REIT) regulations and liberalizing the foreign direct investment (FDI) policy.

These moves will make India more attractive for foreign investors and developers, as transparency is important. Earlier, they were competing with local developers and it was not a level playing field. This will send out a positive message about India to the world, with its move towards a transparent economy,

With increasing institutional investor participation, best practices are adopted and the sector matures. Thus, experts believe that we are at the start of a progressive growth cycle, in reality. One may also see consolidation among developers. These factors will surely attract more foreign investors into Indian real estate.

How demonetization affects the credibility of the property market

Demonetization could also improve the ease of doing business in the long term. Corruption in obtaining approvals is cited as the key impediment to improving ease of business in the country. By limiting the avenues to exhibit this behavior, there would be a definite positive impact on the ease of doing business. This will encourage economic growth and boost participation from local and global businesses.

However, demonetization by itself, will not bring about greater transparency or eliminate unscrupulous intermediaries.

This needs to be supplemented through appropriate regulation in real estates, such as eventual minimization of Benami property transactions, a ban on all transactions above a particular value in cash and a regime that naturally compels disclosure through the better understanding of valuations.

Impact of demonetization on REITs

Will demonetization force investors to consider other avenues for investing in real estates, such as REITs? Experts point out that investors typically engage with developers in the primary markets, which offer relative safety of their investments.

Demonetization will add to the credibility of developers, to the extent that there is likely to be less unaccounted cash transactions, even during the process of development. So, if anything, investors should actually feel safer working with developers.

Also, investors, who do not wish to get directly involved in the cycle of development and disposal of a property, typically prefer REITs. Moreover, REITs in India focus only on certain forms of income generating property, such as commercial offices, retail, hospitality, and warehousing. This leaves the residential market out of the ambit of REITs. Consequently, investors looking to invest in bulk in the residential market, will not shift focus to REITs.

Will demonetization result in lower interest rates?

With demonetization, banks are receiving massive amounts of liquidity, in the form of cash deposits. This means that there will be a surge in the funds available to them for lending and is likely to result in lower interest rates. Demonetization may also widen the tax base and improve the fiscal deficit position. A high fiscal deficit puts upward pressure on interest rates. Any improvement in the fiscal position could result in lower interest rates over the long term. Alternatively, the government can also pass on some of the additional collections to the public, through lower income tax rates. This would result in more capital in the hands of the common man and boost residential sales.