India’s bank note switch-up a “game-changer” for real estate

This month, India announced that its 500 and 1,000 rupee notes were no longer valid tender. In an unscheduled speech to the nation, Prime Minister Narendra Modi told the country that as of midnight on 8th November, the two notes would be scrapped altogether, with any notes in circulation required to be deposited in banks by the end of the year.

The unprecedented decision, which is designed to curb tax evasion and crack down on illegal money practices in the country, saw people line up at cash machines late that evening. The Reserve Bank of India is now issuing replacement currency notes of 2,000 and 500 rupees.

The unexpected move, though, has been heralded as a “game-changer” for the real estate world by Knight Frank.

In the short-term, the agency warns of “serious repercussions”, with downward pressure placed on property sales and prices.

“It is a very powerful measure to curb black money,” Nirmal Jain, chairman of IIFL Holdings Ltd, told Bloomberg. “It will have a deflationary impact in general and more specifically on real estate prices and make homes affordable.”

In the long-term, though, Knight Frank highlights the benefits of the “much needed” currency policy, which it says will “create a level playing field amongst all stakeholders in the sector”.

With transparency in the sector significantly increased, the agency foresees “higher volumes of FDI coming in at competitive rates”.

“Institutional funding to developers which till present day came with a high risk weightage is bound to see some softening. Prices coming down to reasonable levels in the residential property market cannot be ruled out,” adds the firm.

“Any green shoots of recovery that were there in this sector will lie low, at least for this fiscal,” says Shishir Baijal, Chairman & Managing Director, Knight Frank India. “In FY 2017-18 however, the market will discover a new normal in volume and price.”

“Next year this time, the real estate sector will be a totally different industry,” he adds. “A more evolved, transparent and a corporatized one!”