On 8th November 2016, demonetization of Rs. 500 and Rs. 1000 notes was announced by the Prime Mininster, Shri Narendra Modi. One of the sectors where experts thought there would be high negative impact, was real estate and construction. With things returning to normal after demonetization, it is now possible to assess the impact.
The impact of demonetization was felt the most by the section of the sector, still dealing in cash transactions. These include:-
- Builders as well as building material suppliers, who do most of their sales with cash payments.
- Large construction companies who collect payments in cash, such as toll-road operation companies.
- Microfinance companies which give loans for small construction and home improvements. As these loans are disbursed in cash, shortage of currency created challenges.
Most of the affected firms had to adapt by changing their business practices. For example, toll-road operators started accepting digital payments. Another example is microfinance companies, which started to open banking accounts for their customers for disbursements.
Companies which get most of their payments by non-cash modes such as cheques or online transfers were largely unaffected by demonetizaztion. This segment includes leading residential property developers, commercial property developers and large building material suppliers. Further, any purchase made by taking loans was already in non-cash mode and hence unaffected by demonetization. Some experts were of the opinion that with price remaining stable or dipping in this period, it was a good time for customers to make purchases.
However, there was one side-effect of demonetization that impacted even large companies in the sector. Due to high deposits, expectations started to build that banks will aggressively pursue credit growth by reducing interest rates. With an expectation of reduction in interest rate for home loans, many prospective buyers decided to wait and watch. Since majority of buyers avail home loans, this reduced demand for homes and consequently dampened sentiments in the sector.
With things getting back to normal and interest rate stabilizing in a few months, the home loan scenario is expected to recover soon. Demand for segments of the sector already on non-cash payment modes of payment will become normal. For others, change in business practices may take some more time. With remonetization, such firms can continue with their old practices as well. In the long run, there is unlikely to be significant negative impact on sales.