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Effects of Demonetisation in India on Real Estate Investing

Nov 17, 2017 11:47 AM 4 min read

Effects of Demonetisation in India on Real Estate InvestingFor investment professionals, demonetisation has thrown open the doors of real estate opportunities. And with reduced speculation in the medium term, thanks to increased regulatory oversight under RERA Act, this impact is hopefully here to stay. Non-speculative real estate assets - reflecting real fundamentals – are not only beneficial to the economy overall, but also creates opportunities for investors:


  1. Lending Opportunity to Small to Medium-Sized Developers
    • While large-scale projects and developers have received significant interest from private equity and real money investors, small to medium-sized developers have in contrast seen their traditional sources of funding dry up due to demonetisation. The fact that most of them were struggling with high debt levels prior only exacerbated their problem
    • Additionally, RERA Act has ended the traditional practice of using the home buyer’s advance payments to fund future projects. In addition, access to cash has been reduced. These changes are positive in the long run and have created a need to provide funding to small and medium-sized developers, with a specific opportunity in bridge loans, to finish projects that are stuck at 50-80% of completion
    • The obvious question is that given the influx of funds into real estate over the last 3 years, why do these opportunities exist? The reasons are:
      1. The relatively smaller size of the projects creates deal sizes not worth the time for some of the larger funds. Mind you, the due diligence required is the same as the larger ticket size deals
      2. Asymmetric information is another issue. However, working with local advisors to put together a portfolio of such assets to create dispersion around location of project, type of project and term structures of loans should create value
      3. Most of the focus in the last few years has been on high quality office space. However, a lot of residential projects are stuck as well. The ability to acquire these residential projects at a discount or to use structured finance transaction to get equity kickers can create significant value
  2. Sale and Leaseback Transactions:
    • While a lot of lenders have seen a rise in NPAs on their loan books as high debt levels take a toll, foreign investors have so far been reluctant to invest in distressed Indian opportunities
    • Demonetisation has kicked-off the process of making the real estate sector far more professional and institutionalized. Lenders should use this revitalized image to shore up their balance sheets. There is tremendous demand for attractive brownfield real estate from yield hungry foreign investors
    • Perhaps banks can start monetising their real estate assets through a sale and lease back agreement with foreign investors and take advantage of this new “clean” image
      1. For example A large bank may be owning significant property in prime areas of, say, Delhi, Mumbai, Kolkata and Bengaluru. The bank can work with an investor such as a pension fund or an insurance company to sell their office assets to the investor and lease it back for operations. This solves a twofold problem
        1. The bank gets capital infusion that it sorely requires and the investor gains access to attractive assets with a better credit borrower rather than investing in the distressed loans
        2. The economy overall benefits tremendously since the capital infusion adds value. Demonetisation has created this opportunity with an enhanced image for the real estate sector
  3. Affordable Housing:
    • Demonetisation has reduced the speculative nature of house buying to some extent. Hence houses are in general more affordable. This implies this is the right time to push ahead with the affordable housing scheme in full throttle
    • While the interest rate subsidies by the government are a step in the right direction, we feel additional regulations are required. Essentially demonetisation has provided us with a real estate sector that is ripe for new regulations such as:
      1. Affordable Housing PPP: The Road project PPP model in India is a good template to learn from. The government should standardize documentation and take care of land acquisition. The government should acquire land that is relevant for affordable housing directly. This also assists distressed developers to monetize assets from their land banks.
      2. Affordable Housing Authority: The government should create a central authority modelled on the lines of NHAI to take care of land acquisition, title deed issues, environmental clearances and viability analysis
      3. Bidding Auction:  The private sector should bid for projects all the way from grants on one end of the spectrum to revenue premium at the other, depending on the financial feasibility of the projects


This is an opportunity to leverage the new-found credibility courtesy demonetisation to provide a fillip to a core and much troubled sector of the economy and create not just economic value through efficient use of capital, but also tremendous social capital as a nation.


Originally published in Financial Express