Note ban to affect real estate sales only in the short term: Abhishek Lodha

December 1, 2016 Business Standard

Lodha says that their estimates are that if interest rates drop by 2%, EMIs will dip 15%

note

Demonetization has hit many industries, especially the real estate industry where use of cash is prevalent. Lodha Developers, the largest property developer by sales, however, sees a silver lining with the home loan interest rates expected to soften. ABHISHEK LODHA, managing director of the company, spoke with Raghavendra Kamath on the impact of demonetization on real estate. Edited Excerpts:

There have been reports that demonetization could lead to 20-30% decline in home prices. What is your take on that?

It is being said by those who have vested interests in stock markets. They know if money does not go to real estate, it will go to stock markets. No nation has experienced this over the past 50-60 years because it is not really demonetization; it’s an exchange of currency. You return old notes and as long as you are happy explaining where you got it from, you will get new notes. It’s not about the value that has disappeared from the market. The question that would arise is that what it does to the economics of any industry including real estate.

People invest in real estate today because property prices have been rising. If prices fall, they will not buy or invest in future as there will be no appreciation on investments.

So, how will demonetization impact real estate?

In my view, it would do nothing to the economics of real estate except that in all likelihood, interest rates will come down significantly. And, when rates come down, it means EMIs will also fall. Our estimates are that if interest rates drop by two per cent, EMIs will dip 15%. It’s a massive stimulus to the consumption of categories where purchasing usually happens by borrowing money. Real estate is the biggest category where one borrows money to buy a house. Historically, whenever interest rates fell, demand had increased in real estate. Hence, it’s counter-intuitive for a city like Mumbai to believe that housing demand will see a slowdown.

To simplify, on the one hand you have stimulus which will increase demand. On the other, there is no cash involvement in the market. Hence, I fail to understand how the market will be affected on account of this.

So, you’re saying falling interest rates will offset the demonetization impact on sales…I don’t think it’s an offset. It will only boost.

But, the resale market has come to a standstill. What is your view on that?

It’s a myth that people use real estate to park cash. Maybe there are some markets in the NCR (National Capital Region) and the secondary markets in Mumbai where cash is involved. But, I’m not implying that there’s no impact on the sector at all. In the next two or three months, transaction won’t happen until buyers and sellers adjust to the new reality. Once this happens, the situation will normalize because there is no change in the underlying value of assets. People say if sellers were taking 25% of the price in cash earlier, there is no way they’ll reduce prices by 25% only because they’ll have to take 100 per cent value in cheque.

So, what’s the kind of impact you have seen on your sales?

We have done sales of Rs 300 crore since demonetization was announced. If there was no demonetization, we would have certainly done more. But, you should also understand that people were standing in queues to exchange and withdraw money, which was the main focus. But, as the situation is settling down, they are now looking into other things as well.

What kind of impact do you see on your sales and liquidity conditions in the next three to four quarters?

We see a short-term impact on the November sales and may have some spill-over in December also. Beyond that, we don’t see much impact.

Do you see any impact on your borrowing costs?

We believe our borrowing costs will come down by 150 basis points.

Do you think you will be able to meet your annual sales target?

It’s too early to assess the impact of demonetization. We have to see how things pan out in the near future.

What will be the impact of demonetization and Real Estate Regulatory Authority on your IPO plans?
I don’t think there will be any direct impact. If interest rates go down and demand gets a boost, it will be good for the sector.