How Demonetization, RERA, IL&FS Crisis and Covid-19 Pandemic Impacted Property Sales in Pune

Real Estate Trends Dec 24, 2021

Property Sales in Pune experienced significant growth in late-2020 and 2021, registering higher transactions than the pre-pandemic levels. Pune’s real estate market has shown immense resilience through the pandemic, bouncing back strongly from the slump caused by the lockdowns. Prior to the market disruption caused by Covid-19, other economic events like Demonetization, RERA implementation and IL&FS crisis have impacted the property sales market in Pune. At TEAL, we analysed the property sales market in Pune during the period of 2014 - 2021 in the light of the Covid-19 pandemic and other economic reforms that caused an impact.

TEAL is India’s largest repository of real estate data.  At TEAL, we leverage cutting-edge big data analytics and machine-learning to power our range of due diligence products and valuation tools. Our data repository covers title documents, municipal and litigation records, RERA registration details among other data points in Delhi-NCR, the Mumbai Metropolitan Region, Pune, Bangalore, Hyderabad, Warangal, Chennai, Coimbatore and other cities in Maharashtra.

Source: TEAL Data

The property sales market in Pune has experienced steady growth over the years as it has navigated through multiple economic events that impacted its performance. Starting with the implementation of Demonetization in November 2016, through other events like the enactment of RERA, GST, the NBFC crisis and the more recent Covid-19 pandemic, the property sales market in Pune has shown resilience and remarkable recovery.

The post-pandemic property sales growth in Pune has surpassed pre-pandemic sales volume. This can be attributed to stamp duty holidays introduced by the Maharashtra State Government, pent up market demand, historically low interest rates and the work from home culture where people have realized the need for additional home space. Post the second wave in 2021 especially, lending institutions have reduced their home loan interest rates to record low levels that has driven up property sales volume.

Effect of Demonetization on Property Sales

What is Demonetization?

Demonetization is the act of stripping the legal tender status of currency units in a country. It involves the withdrawal of the current form or forms of money from being circulated, usually replaced with new notes or coins. The Indian government demonetised the Rs 500 and Rs 1000 face-valued currency notes on 8th November 2016 [1].

Immediate Effect of Demonetization on Property Sales

The real-estate market was hit hard by demonetization in its early days as transactions in the real estate sector involve a strong cash component. Prior to the implementation of demonetization, real estate was considered the best place to park black money. This caused property prices to increase by several times the actual values due to artificial demand in the market [3] Though stamp duty is paid online using the state government's GRAS system, people are finding it difficult to transact due to a liquidity crunch which impedes property sale and purchase [2].

Source: TEAL Data

The drastic drop in property sales volume in January is a part of a seasonal trend in property sales in Pune where property sales experience a fall, after a spike in transactions during the festive season in October, November and December. Despite the seasonal trend, the months of November, December and January witnessed lower property sales transactions after the implementation of Demonetization as an immediate effect.

Source: TEAL Data

The graph above illustrates the monthly property sales transactions for January, November and December, and a seasonal trend that can be noted is the spike in sales volume during November and December. In the 9 year period of 2013 - 2021, it can be seen that November 2016, December 2016 and January 2017 recorded the lowest monthly sales transactions. This shows the immediate impact of demonetization on property sales in Pune.

Long Term Demonetization Effect on Property Sales

The affordable housing policy (Pradhan Mantri Awas Yojana) coupled with incentives such as the softening of interest rates helped offset the impact of demonetisation. While there was uncertainty and decelerated property sales in the first year after demonetization, the real estate sector in Pune has emerged strongly there on. With the elimination of artificial demand in the market, the end-users have emerged as the key players in the primary property sales market [4].

What is the Result after 5 years?

The implementation of demonetisation along with the enactment of RERA in March, 2017 and Goods and Services Tax (GST) in July, 2017 has ensured transparency and organization in the real estate market. While one cannot say that black money and artificial demand has been completely eliminated from the market, they have certainly become less influential in property sales transactions. According to a report by Anarock, “From a more than 100 percent difference between the two rates in certain areas in Mumbai, Pune, Gurgaon in 2015, some localities presently show a mere 6 percent variation” [4].

RERA & Property Sales in Pune

What is RERA?

The Real Estate (Regulation and Development) Act, 2016, (RERA) is an act passed by the Indian parliament. The RERA seeks to protect the interests of home buyers and also boost investments in the real estate sector [5]. To incorporate transparency in project completion status, the developers must disclose critical statistics about the project and the construction status on the official website of the Authority [6].

Maharashtra was one of the earliest States to effectively implement RERA with the establishment of MahaRERA, making it mandatory for all ongoing residential and commercial projects to be registered with it [7]. By successfully setting up a redressal forum which called for an amicable resolving of disputes between developers and home-buyers, Maharashtra emerged as one of the most successful RERA experiments.

Effect of RERA Implementation on Property Sales

As an immediate effect of implementation of RERA, the supply side of real estate took a hit as developers had to get their projects RERA-registered before putting it out in the market. The focus shifted to adhering to the compliance requirements to avoid litigation [6].

Source: TEAL Data

Property sales, on the other hand, remained largely unaffected by the implementation of RERA. According to TEAL data, property sales volume in June 2017 was 97% and 66% higher than the previous two years respectively. July 2017 also recorded higher sales transactions than the previous 5 years. This positive impact of RERA can be attributed to the successful and systematic implementation of RERA in the state of Maharashtra. The enactment of Central Goods and Services Tax Act, 2017 (GST) in July, 2017 could also have played a role in the improvement in property sales.

Post the implementation of RERA in Maharashtra, the confidence of the buyers has increased manifold since they believe that they now have an impartial body to listen to their grievances and act accordingly [8].

Median Property Prices Take a Hit During the IL&FS Crisis

Source: TEAL Data

Non-Banking Financial Companies (NBFCs) are quasi-banking institutions in India. Like banks, they are allowed to disburse loans to people but they are not allowed to take deposits from customers in order to make these loans. Hence, NBFCs borrow money from the bond market to fund themselves [9].

The NBFC crisis started when IL&FS, a prominent NBFC company, defaulted to SIDBI in August 2018. When IL&FS mismanaged its funds and was unable to pay back its creditors for an outstanding amount of Rs. 90,000, the faulty business model of the NBFCs became exposed [10]. NBFCs were a major source of funding to the real estate developers post the cash freeze from the banking sector due to the increase of Non Performing Assets (NPA). With the NBFC crisis, it worsened the scenario for developers. The NBFC crisis also affected the home-buyers sentiment and low investor confidence restricted price growth from mid-2018 to 2019 [11].

Combined Effect of Demonetization, RERA and GST

Source: TEAL Data

With the implementation of Demonetization, RERA and GST in 2016 and 2017, property sales in Pune did experience growth in sales volume over the next few years. Property sales in 2018 witnessed a yearly increase of 14.6%. Further, property sales transactions in 2019 recorded a 15.3% increase from 2018.

The nation was hit with the first wave of the Covid-19 pandemic in March 2020, with the Central Government announcing a complete lockdown in April and extended till the end of May. As the property sales market in Pune was recovering from the economic slowdown from the previous years, the pandemic caused another disruption in the market.

Source: TEAL Data

In the graph above showing the daily property sales trends in Pune, it can be seen that from January to September 2020, the overall property sales scenario remained sluggish when compared to the recovering market in 2019. April - June 2020 quarter was the affected quarter of the year with the country witnessing a nation-wide lockdown and  multiple curfews to curb the spread of the Covid-19 virus. During this period, property sales in Pune witnessed a quarterly drop of 65% from Q1 2020.

To offset the impact of the pandemic on the real estate sector, the Maharashtra State Government reduced the stamp duty rate to 2% and 3% during the period of September - December 2020 and January - March 2021 respectively. The stamp duty rate in the state prior to the reduction was 5%.

With the pent up demand, stamp duty holidays and reduced interest rates, the property sales market was recovering in late 2020 and 2021. The average quarterly  property sales registered in Q4 2020 and Q1 2021 was 114% higher than the property sales registered in Q3 2020. This forward growth quickly overturned as the nation witnessed the second wave of the Covid-19 pandemic, and property sales fell by 54% in Q2 2021 and recovered to a 41% increase in Q3 2021.

To further propel property sales, the repo rate which was reduced by the Reserve Bank of India (RBI) in March 2020 still remains unchanged at 4%. Taking advantage of this, several leading banks have further reduced their interest rates ahead of the festive season which has boosted property sales. TEAL data shows that the average monthly property sales transactions in October and November 2021 was 3% higher than the average monthly sales volume in August and September.

Property Sales Outlook for 2022

The property sales market in Pune is anticipated to have a more stable market in 2022, having weathered through several structural reforms and the Covid-19 pandemic. The property sales growth is expected to continue into 2022. According to a 2022 Outlook Report, A 5% rise in residential real estate prices is expected in 2022 [12].


References

[1] https://cleartax.in/g/terms/demonetization

[2] https://www.dnaindia.com/mumbai/report-demonetization-hits-real-estate-hard-2278879

[3] https://www.financialexpress.com/money/3-years-since-demonetisation-bursts-the-bubble-real-estate-still-facing-demand-crunch/1759040/

[4] https://www.moneycontrol.com/news/business/real-estate/five-years-of-demonetisation-have-things-changed-for-the-real-estate-sector-7709561.html

[5] https://housing.com/news/rera-will-impact-real-estate-industry/

[6] https://www.legalserviceindia.com/legal/article-4003-rera-a-boon-or-bane-for-real-estate-sector.html

[7] https://www.99acres.com/articles/impact-of-rera.html

[8] https://www.rerafiling.com/rera-article-detail.php/505/rera-rsquo-s-impact-on-maharashtra

[9] https://www.managementstudyguide.com/great-indian-nbfc-crisis.htm

[10] https://nbfclicenseindia.com/blog/nbfc-crisis/

[11] https://www.99acres.com/articles/impact-of-nbfc-crisis-on-indian-real-estate.html

[12] https://www.financialexpress.com/industry/property-market-2022-to-be-a-more-stable-year-says-report/2385659/


At TEAL, we are building the next generation of property due diligence using big data analytics and machine learning. We provide reliable information about property ownership, registration status, disputes, tax compliance history and all other information that you will need to make a safe and secure property investment. To learn how TEAL can help you in your journey, visit tealindia.in.


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