Indian currency demonetization likely to hurt real-estate business, property prices to fall, says Fitch

The drastic move by the Indian central government, led by Prime Minister Narendra Modi to abolish the existence of INR500 and INR1000 notes, with effect from November 9, 2016 is expected to lead to a fall in the prices of real estate properties amid negatively affecting homebuilders at least in the next 12-24 months.

India has a significant cash-based economy, and therefore considerable undeclared income in circulation, and the government's move is likely to severely curtail the use of any undeclared income which is usually retained in the form of cash or invested in property and gold, Fitch Ratings reported.

The regulation stipulates that they have to exchange old currency notes into those with lower denominations or new current notes, by 30 December 2016. The regulation comes at a time when there are hints of increased scrutiny of income-tax evasion, and follows closely on the heels of the tax amnesty scheme which expired on 30 September 2016.

The negative impact on cash collections of homebuilders such as Indiabulls Real Estate Limited (IBREL, B+/Stable) and Lodha Developers Private Limited (B/Negative) may be slow initially, because a considerable portion of their cash collections in the next three to six months is likely to stem from previously sold properties. However risks to these companies may increase, as consumers are likely to take more than a few months to adjust to the new environment.

Further, the pace of project execution across the wider real-estate sector may also experience a slowdown at least until the industry adjusts to the new paradigm. Project executions may be slower - particularly for new and existing projects that have a significant number of pending regulatory and local government approvals.

"However, we expect that the curtailing of undeclared wealth in the economy will be supportive of the real-estate sector over the longer term, as it is likely to improve affordability and bring about greater transparency," Fitch Ratings commented in its latest research report.

At 11:40GMT, the USD/INR was trading 0.08 percent higher at 66.62, compared to the previous close of 66.56.