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Even Trump Tower not immune to Indian property price slump amid Modi’s demonetisation

Residential and commercial buildings stand in Mumbai. Property prices have slumped since the PM annouced a demonetisation policy.Residential and commercial buildings stand in Mumbai. Property prices have slumped since the PM annouced a demonetisation policy. Photo: Bloomberg

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 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.

India is looking to convert its centuries-old decaying housing into modern living.India is looking to convert its centuries-old decaying housing into modern living. Photo: Bloomberg

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, who cited discussions with developers. 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 15 million rupees ($US220,000). “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.”

Prime Minister Narendra Modi has faced criticism for a crackdown on the underground economy that has led to a withdrawal of cash.Prime Minister Narendra Modi has faced criticism for a crackdown on the underground economy that has led to a withdrawal of cash. Photo: Bloomberg

India’s largest developers, including DLF Ltd. and Lodha Developers Ltd., 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, which includes a 24-hour resident manager and a fractional membership to a private jet service, has so far sold about 60 per cent of the units since launching the project in 2014, according to Lodha.

Lodha said in an e-mailed response to Bloomberg News that while it has notched sales of more 3 billion rupees for all its properties since November’s demonetization, sales would have been higher without the policy change.

Cash Component

India withdrew 86 per cent of the country’s banknotes in the nation’s biggest crackdown against corruption in almost four decades. Unaccounted-for money makes up as much as one-fifth of the Indian economy, according to Ambit Capital Pvt.

New developments in India are tipped to stall as cash dries up.New developments in India are tipped to stall as cash dries up. Photo: Bloomberg

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

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

Demonetisation has taken a toll on sales of under-construction properties, because “buyers have postponed purchase decisions given widespread talk about a price correction,” Citigroup Inc. said in a note to clients last month.

Other new guidelines introduced are expected to push unprofessional companies from the market.Other new guidelines introduced are expected to push unprofessional companies from the market. Photo: Dhiraj Singh

Crashing Prices

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., the country’s largest private-sector lender by value.

In December, Prestige Estates Projects Ltd., a Bangalore-based developer, said its pre-sales slid by half to about 1 billion rupees 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 in a conference call with investors.

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 percent from 2015 levels, the best rate in five years, according to the data.

Developers and real estate 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.

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.

“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,” he said.

Bloomberg