The city skyline seen from the rooftop of the Four Seasons Hotel in the Worli area of Mumbai. Demonetisation may especially hurt luxury market and land transactions. Image Credit: Bloomberg

Singapore: After trying for four months to sell his apartment in a western suburb of Mumbai, Meher Verma decided to cut the price by 10 per cent. With property demand plummeting in the wake of November’s sudden ban on high-denomination notes, he’s not sure the reduction will do the trick.

“I was hoping to sell my house soon,” said Verma, who put his two-bedroom property in Andheri on the market for $400,000 (Dh1.47 million) in September. “Now it looks like I might have to cut my price or wait much longer for the market to improve.”

Real estate has long been a place where Indians have parked cash, often using money on which taxes haven’t been paid. Now, with Prime Minister Narendra Modi’s crackdown on so-called black money and the underground economy, real estate is taking a hit. The rate of home sales has fallen by about half since the government acted in early November, according to an estimate from Khushru Jijina, managing director of Piramal Fund Management Pvt. in Mumbai.

Home prices may decline 20 per cent and land prices could plummet as much as 25 per cent, according to analysts’ projections.

“Those who were looking to buy property as an investment vanished overnight from the market after the cash ban,” said Aubrey Carvallo, a Mumbai broker who has never seen demand in Mumbai so low in his two decades of working in the industry. He’s been unsuccessfully seeking buyers for eight apartments with prices starting at Rs15 million ($220,000). “They are thinking of moving to stock markets and other financial assets, as real estate prices are set to correct in the coming years with the government crackdown on unaccounted money expected to continue.”

India’s largest developers say they’re taking a hit on sales. Even an association with the US President-elect hasn’t helped stoke sales at Lodha, which is building a Donald Trump-branded apartment tower in Mumbai’s Worli district. The 75-floor Trump Tower Mumbai includes a 24-hour resident manager and a fractional membership to a private jet service. The company has sold 226 of the 396 units in the project from its launch in 2014 through last June, said Lodha Developers, which added that it limits the sale of its inventory at the Trump Tower.

Lodha said in an e-mailed response to Bloomberg News that while it has notched sales of more than Rs3 billion (Dh161.8 million) for all its properties since November’s demonetisation, sales would have been higher without the policy change.

“No doubt that sentiment for real estate will be subdued over the next three to six months,” said Jijina at Piramal, citing the most pressure on luxury projects India-wide and in secondary cities such as Ahmedabad, Indore and Jaipur. Markets such as the region around the New Delhi area “where some developers took only cash will be in severe trouble”, he said.

Demonetisation of high-value currency notes may especially hurt luxury market and land transactions because the cash component ranges from 30-50 per cent of the value of such deals, said Pankaj Kapoor, founder of Liases Foras Real Estate Rating & Research Pvt.

“Land prices could drop as much as 25 per cent once corruption is reduced and black money is out of the equation,” Kapoor said.

CLSA Asia-Pacific Markets said in a note to clients that property and gold will see the biggest negative impacts due to their reliance on cash purchases. It put predictions for property price decreases at between 10-20 per cent, and even more for land. The rate of home sales over the past year is down 13 per cent from its 2013 peak, while property launches have dropped 45 per cent from the peak in the same period, CLSA said.

Demonetisation has taken a toll on sales of under-construction properties, as “buyers have postponed purchase decisions given widespread talk about a price correction,” Citigroup Inc. said.

Developers holding large land banks will be affected and their projects will suffer as “prices will go crashing”, said Abhay Aima, group head for private banking at Mumbai-based HDFC Bank Ltd.

In December, Prestige Estates Projects Ltd., a Bengaluru-based developer, said its pre-sales slid by half to about Rs1 billion compared with previous months. Still, given the muted profitability in the residential business, developers are unlikely to cut prices sharply, the firm said. Once the anticipation of price declines eases, volumes should recover, the company said.

India’s largest developers had just been starting to see the first signs of a recovery in demand for homes when the policy change came. Residential sales in Mumbai had climbed to the highest in seven years in the quarter ending in September, Liases Foras data show. Sales measured by area across eight major Indian cities rose 15 per cent from 2015 levels, the best rate in five years.

DLF said that its residential sales of mostly high-end homes in Gurgaon, near New Delhi, had been looking up until demonetisation. Enquiries remain high, but buying decisions are being deferred, the developer said. Markets should return to normal over the next two to three quarters, it said.

Abhishek Lodha, managing director at Lodha Group, said he wouldn’t cut prices further, as construction costs have risen with demonetisation and might still rise with a goods and services tax due to come into effect this year.

“We do see a short-term impact on November sales volumes, with some spillover in December, too,” Lodha said. “Beyond that, we don’t see much impact.”

Developers and analysts agree that, over the long term, the combined effects of the demonetisation and a new real estate law that will become effective this year will result in a consolidation of the industry, with stronger developers gaining strength while weaker ones get weeded out. Established firms will benefit from having more transparent purchases dominate the market going forward, and their buyer base will grow, according to JP Morgan Chase & Co.

New regulations enacted last year, which stipulate more disclosure from developers and penalise them for failing to do so or changing the terms of agreed contracts, will help improve consumer confidence and push unprofessional companies from the sector, Lodha said. Demonetisation as well as the goods and services tax will help India’s economy develop, he said.

“We are hopeful that, over the next decade, real estate will be seen in the same positive light that it is seen in the developed world,” Lodha said.