The government's demonetisation drive is expected to have a significant impact on the real estate sector, with data compiled by BloombergQuint showing that new registrations have dipped by as much as 40 percent in Mumbai alone. Real estate players though are putting up a brave face, at least for now.
A look at how the listed players have fared from November 9 to December 2, will show that investors don't seem too convinced, with the Nifty Realty index slipping just less than 18 percent, according to data from Bloomberg. The only stock to buck the trend is Phoenix Mills Ltd. which gained over 7 percent, during the same period.
BloombergQuint spoke to Pradumna Kanodia, the director of finance at Phoenix Mills, who said the fact that a bigger chunk of the company's revenue comes in from the commercial rental business means it's more insulated to the cash crunch than others.
Here are edited excerpts from that interview
What has been the impact of the government's demonetisation drive on demand for your projects?
We have not seen any knee-jerk reaction from the retailer to suggest that suddenly the demand for retail space has got impacted, zero impact I would say as far as the demand and supply position is concerned. We continue to have all the retailers who had shown interest with us continued to engage with us, there is no change in their status and there have been no change in discussion with us about taking additional space in our mall or new spaces in our mall. So from the retailers' point of view and their interactions with us, it has been very positive and no impact at all as far as the steps taken by the government are concerned.
How are you coping up with the cash crunch in your ongoing projects? How are you making provisions for salaries for your employees and other payments for your suppliers and contractors?
The ongoing projects which are largely the residential projects have seen zero impact from a cash flow point of view and the ongoing sales and the existing sales that we already achieved gives us a free cash flow as we go forward which is more than sufficient for us to take care of our ongoing residential projects from a completion point of view.
All our transactions happen through banking channels and like the salaries for our employees got paid on Tuesday, it was the due date as we pay on the last date of the month and they were credited in the evening. Similarly, all our contractors and our suppliers who deal with us, they get paid out depending on the credit term negotiated with them. So the payments have been happening, there has been absolutely no issue about the cash flow from that point of view.
Do you expect real estate prices to moderate on the back of the demonetisation measures?
Well again the knee-jerk reaction would suggest so, but I think from a medium to long term view these are positive signs for the residential and real estate players who are more organised and more transparent in their dealings. They will be the people who would stand to benefit and we don't see a long term negative impact of this on the real estate market.
Do you think the Reserve Bank of India (RBI) cut interest rates by 25 basis points, will that cut be enough to spur real estate demand?
25 basis points is not a worthwhile cut to really make an impact, given the fact that there is so much liquidity already in the system plus inflation is cooling. There is definitely a case for larger reduction and anything in the range of 25 basis points may not be material in nature and we should be looking at a better rate cut. If not in the coming week but definitely in the month of January, when they have actually assessed the impact.
Banks haven't passed on the entire magnitude of rate cuts from the RBI. Are you hopeful that Equated Monthly Installments (EMIs) will fall for consumers even if the RBI cuts rates?
Yes, their are few banks which have been slightly late in passing out their benefits but now most of the banks have started advertising their loans very attractively and the rate cuts which happened over the last one year, majority of them are getting passed on now and I am hopeful that as we go forward the fresh rate cuts would be passed on entirely to the consumer.
The real estate industry has been grappling with the issue of unsold inventory. How do you see it panning out?
There has been the mismatch in demand and supply while some pockets have seen the demands not in line with the supply and therefore the inventory build-up has happened. But now with the interest rates coming down, money and affordability will improve, there is a likelihood of the inventory getting rationalised and the number should come down.
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