Residential property sales and prices to fall: Fitch on demonetising notes

Government's recent move to demonetise currency notes of Rs 500 and Rs 1000 may hurt homebuilders for the next 12-24 hours, a report said.

On Tuesday, the Prime Minister Narendra Modi while addressing the nation, had said that higher denominations currency notes will no longer be a legal tender. The decision was taken to curb nearly Rs 13 lakh crore black money floating the country.

According to the data provided by the government, only about 4% of Indian adults (or around 51 million people) file income-tax returns, and of this only around 13 million people are estimated to have paid income tax for the fiscal year 2014-2015. 

A four-month government tax amnesty ending on 30 September 2016 has brought in some $10 billion of undeclared wealth via around 64,200 new declarations. 

Following the news, the real estate sector was majorly hit. According to a Fitch Ratings report, the residential property prices and the property sales to fall, as consumers attempt to work out how best to declare their wealth.

As per Modi's announcement, public have to exchange old currency notes into those with lower denominations or new current notes, by December 30, 2016. The regulation comes at a time when there are hints of increased scrutiny of income-tax evasion, and follows closely on the heels of the tax amnesty scheme which expired on 30 September 2016, the report said.

The report mentioned that the negative impact will be more on sales of higher-end, premium property which have high-net worth individuals and investors as buyers, rather than entry-level housing targeted by first-time homebuyers which are more often purchased by salaried individuals with limited undeclared income. 

Also, the homebuilders from National Capital Region (NCR) to be hit more than other areas, considering, the NCR have greater reliance on cash-based transactions, the report added.

Naming the homebuilder, the report said that the negative impact on cash collections of Indiabulls Real Estate Limited and Lodha Developers Private Limited, likely to be slow initially because because a considerable portion of their cash collections in the next three to six months is likely to stem from previously sold properties. 

Hasira De Silva, CFA, Fitch Ratings, in the report titled 'Currency Demonetisation Likely to Hurt Indian Homebuilders' Sales', said, "However risks to these companies may increase, as consumers are likely to take more than a few months to adjust to the new environment. The pace of project execution across the wider real-estate sector may also experience a slowdown at least until the industry adjusts to the new paradigm".

Moreover, the project executions will slow down for new and existing projects as they have significant number of pending regulatory and local government approvals.  

However, for longer term, the curtailing of undeclared wealth in the economy will be supportive of the real-estate sector over the longer term, as it is likely to improve affordability and bring about greater transparency, the report added.