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November 14, 2016

On 8th November 2016, in a move that surprised the nation, the Indian government demonetized 500 and 1,000 Rupee banknotes in a bid to combat the country’s parallel cash economy.

The notes, which account for around 86 percent of the cash in circulation, were scrapped overnight in the latest step by Prime Minister Narenda Modi, to fight India’s perennial problem with black money and corruption and replacement new 500 and 2,000 rupee notes will be introduced incrementally.

As with any significant shift in economic policy, the move has sparked debate over the impact on capital flows and on the country’s vast real estate sector with India’s Realty Stock Index (NIFTY) falling by almost 12 percent in the aftermath, though purely on sentiment.

However, JLL’s Chairman and Country Head in India, Anuj Puri, believes the fears are unfounded with a likely minimum impact on office / industrial leasing and institutionalized investments business, given the limited role of cash components.

“Project timelines could get stretched as informal sources of capital may not be available,’ says Mr. Puri. “This, in fact, spells more opportunity for institutional capital as FDI, Private Equity and Debt players will suddenly find the market even more transparent and attractive. Moreover, banks could start funding land transactions, thereby decelerating land prices.”

There will be minimal impact on large institutionalized real estate developers with a solid brand and governance format, and are unlikely to suffer.

“Smaller developers are understandably very concerned right now as many have traditionally depended on a certain amount of cash transactions.”

“As a result, we are very likely to see a clean-up of non-serious players due to this ‘surgical strike’ on the parallel economy. Close of the heels of the Real Estate Regulatory Act, this move will further discipline the industry and good for its health over the longer term.”

“In residential real estate, the New or Primary sales segment is largely influenced by home finance players, and deals tend to be facilitated in a transparent manner – meaning that this segment will see only a limited impact in the larger cities,” he explains. “The secondary or resale market will, however, certainly be impacted, given the fact that it does see the involvement of a cash component.”

According to Mr. Puri, retailers could also see some impact on their business in the short-to-medium term due to reduced cash transactions and the luxury segment is likely to be hit on account of the historically high incidence of black money acceptance. However, he believes that, overall, the domestic consumption story remains intact, with no threat to the overall strength and growth of the Indian retail industry.

Read: India – a new global power for dynamic cities 

Anuj Puri
Country Head, JLL India

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