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Saturdays are typically busy at the sales office of Patel’s Planet, one of the many new apartment developments in the suburbs surrounding Mumbai where India’s fledgling middle class has been flocking in recent years.
But last Saturday, it was virtually deserted.
Prateek Patel, the cousin of the developer, complained that he hasn’t sold an apartment since early November, when Indian Prime Minister Narendra Modi shocked the country by announcing an unprecedented currency overhaul.
Mr. Modi’s move took aim at the heart of India’s black-market economy by taking out of circulation existing 500- and 1,000-rupee bills in an effort to reduce corruption, counterfeiting and tax fraud.
Much of the country’s real-estate transactions, particularly land and home sales, have been conducted on a largely cash basis to avoid taxes. With many buyers now on the sidelines, sales have evaporated and huge price discounts are expected when the market gets its bearings back.
“Buyers call to ask if apartment prices have fallen or not,” said Mr. Patel, adding the complex used to sell three to four units a week before Mr. Modi’s announcement. A one-bedroom, 650-square-foot apartment in this complex sells for around 2 million rupees ($29,000).
Mr. Modi’s move is having painful repercussions in India’s real-estate market. Uncertainty and the sharp decline in demand will likely push down the values of residential property in the country’s top cities like Mumbai and Gurgaon by up to 30% over the next year, according to PropEquity, a real-estate data and analytics provider in India.
Cash is used more widely in India than in many other emerging countries, and the two banned currency bills comprised 86% of the cash in circulation in the country, according to India’s central bank. Mr. Modi defended his move Monday at an energy industry conference.
“Our policies are focused on improving India’s long-term economic and social prospects, rather than on short-term headlines,” he said.
Mr. Modi on Nov. 8 basically banned all 500- and 1,000-rupee bills—roughly $200 billion—from circulation immediately. People have until Dec. 30 to exchange the old bills for new ones. But they might face tax consequences or legal problems if they try to exchange large amounts of cash that they have been hoarding.
More than $120 billion in old bills already has been exchanged or deposited, according to the central bank. But millions of people are expected to let their cash hoards go to waste and not risk the government’s ire, analysts say.
The cash crunch creates a headache for many Indian home builders that have borrowed heavily from private lenders at interest rates as high as 22% a year. The developers typically rely on sales of new apartments to generate cash needed to service their debt. If sales slow, builders might need to slash prices to generate cash.
“They are in a chicken and egg situation,” said Samir Jasuja, chief executive of PropEquity, referring to builders in India.
Shares of listed developers have taken a beating since Mr. Modi’s announcement. DLFLtd. shares have fallen 19%, while Housing Development & Infrastructure Ltd. is down 15% and Indiabulls Real Estate Ltd. has shed 14% since the currency replacement. Indiabulls didn’t respond to a request for comment. DLF and HDIL declined to comment. In comparison, the broader S&P BSE Sensex has fallen 4.5% during this period.
Abhishek Lodha, managing director of Lodha Developers Pvt. Ltd., a prominent builder in Mumbai, said the company has seen “a short-term impact on November sales with some spillover in December.” But he predicted the greater availability of cash in the banking system will lead to lower interest rates, and thus fuel sales of homes in the coming months.
For buyers, the all-cash deals before the crackdown often came with lower prices. Many of the buyers were businessmen or professionals such as doctors, who took payments in cash so they didn’t have to declare their full incomes.
No statistics are available yet on how Mr. Modi’s move has affected sales volume or prices. But brokers throughout the country are reporting a decline in activity.
L. Dhayanithi, a real-estate broker based in south India, said three transactions he was working on have fallen through in recent weeks. He said the slowdown has hit both commercial and residential properties.
In one case, Mr. Dhayanithi said he had brokered a deal over three months to sell an office building, worth 120 million rupees. The buyer had given a deposit of 1 million rupees, but the morning after Mr. Modi’s announcement, the buyer demanded that the price be brought down by 20%, said Mr. Dhayanithi. The seller didn’t agree and the deal has stalled.
“All the buyers are waiting for the price to come down,” said Mr. Dhayanithi.
Realty logjam
- The cash crunch creates a headache for many Indian home builders who have borrowed heavily from private lenders at interest rates as high as 22% a year.
- The developers typically rely on sales of new apartments to generate cash needed to service their debt. If sales slow, builders might need to slash prices to generate cash
Source: The Wall Street Journal
