India’s property market is poised for further declines as Prime Minister Narendra Modi’s move to crack down on unaccounted wealth hurts one of the key methods that buyers employ to purchase real estate.
CLSA Asia-Pacific Markets, Credit Suisse Group and Nomura Holdings Inc are estimating that property prices will fall further, after tumbling 20% in the past three years. India will withdraw high-denomination banknotes in the nation’s biggest crackdown against corruption in almost four decades. The move is a blow to the practice of investing in real estate using untaxed income, locally known as black money, which is typically stashed away in cash.
“Since black money played a role in real estate transactions, this crackdown is very likely to hurt the real estate market, which is already reeling under high inventory in top tier-cities such as Mumbai and Delhi,” said Sonal Varma, an economist at Nomura.
The S&P BSE India Realty Index, comprising 11 property stocks, plunged as much as 16%, the biggest drop since 2009, before closing down 10%. DLF Ltd, India’s largest developer, fell 17.3% while Oberoi Realty Ltd, the second-biggest, dropped 9.7%. Indiabulls Real Estate Ltd declined 18%.
Unaccounted wealth accounts for as much as one-fifth of the Indian economy, according to Ambit Capital. Property and gold will see the biggest negative impacts as these are usually considered the best way to deploy such money, CLSA said in a note to clients. Property prices could fall 10% to 20% while the impact on land prices will be bigger, CLSA said.
Five hundred rupee ($7.5) and 1,000 rupee bills ceases to be legal tender from yesterday, and those in circulation will have to be deposited in banks, Modi said in an unscheduled address to the nation. The step by Modi, who is approaching the half-way mark of his term, is an attempt to fulfil his election promise of curbing tax evasion and recovering illegal income stashed overseas. A one-time chance to come clean on unaccounted wealth led to declarations of only about 25bn rupees in tax last year, while an income declaration program this year had met with a mixed response.
Data provided by Mumbai-based Liases Foras Real Estate Rating & Research Pvt show the real estate industry accounts for a large share of illicit deals in the South Asian country, with an estimated 10 to 15% of transactions done with black money. Land prices may drop as much as 40% while luxury home sales will drop and prices will stagnate for the next two years, according to estimates from Pankaj Kapoor, founder of Liases Foras. “This is an overall positive in the long term,” Kapoor said in an interview. “There will be short-term pain but it was a panacea that was needed.”
Modi’s move is likely to impact real-estate and in turn cement and metals sectors too, Credit Suisse said in a note on Wednesday. Lenders that have exposure to real-estate developers and some non-bank finance companies will also be hit. Banks that have lent money to such developers may see a spike in their non-performing assets, Credit Suisse said.
“It is hard to estimate how much of the currency will not be exchanged, i.e., black money that would become worthless,” Mumbai-based Neelkanth Mishra said in the note. “Not all of it is kept in cash under the mattress, but even if this was 20%, it would mean Rs3tn of wealth destroyed.”