July 5, 2017 9:19 pm JST

India cash crunch, rules trigger worst slump in 7 years for new residential projects

MUMBAI (NewsRise) -- The launch of new residential projects in India slumped the most in seven years in the first half of 2017, as a high-value currency ban and a slew of regulatory changes for the real estate sector damped demand, according to a Knight Frank survey.

The industry saw 41% fewer new residential project launches in the first half as sales fell 11% on-year to the lowest five years, the real estate consultant said in a report on Wednesday, based on a survey across eight Indian cities.

In November, Prime Minister Narendra Modi's government recalled high-value currency bills of 500 rupees and 1,000 rupees in a bid to flush out unaccounted wealth. The move resulted in a cash shortage in Asia's third-largest economy, crimping consumer spending. The real estate sector was particularly hit as a bulk of the financial transactions is via cash.

After the so-called demonetization, real estate companies such as DLF and Prestige reported a slump in sales.

The market had barely come out of the demonetization shock when the need for compliance with a newly introduced Real Estate Regulatory Authority "put breaks on a large section of new projects," Knight Frank said in a statement.

The measures adopted by the government have "time and again pushed the already sluggish residential market to the brink," said Shishir Baijal, chairman and managing director of Knight Frank India. "But we believe that these were corrective measures long due to transform the real estate" industry.

Earlier this year, India passed a law to introduce the Real Estate Regulatory Authority, which proposed a host of stringent norms for developers, including mandatory disclosures and registrations, with stiff penalties for non-compliance. The new norms have stalled many projects in Maharashtra, the first Indian state to enforce the law.

"We perceive risk of short-term slowdown in new sales in Mumbai due to lack of project registration and slackened new launches," brokerage Edelweiss Securities said in a report last month.

On July 1, India also introduced a new nationwide Goods and Services Tax that replaced a host of state and federal levies. The new tax is expected to result in a surge in costs for real estate companies as construction attracts an 18% tax rate, compared with 12% previously.

Barring the southern Indian city of Chennai, new projects dried up across all the eight cities, according to the Knight Frank report. The national capital region and the western Indian city of Ahmedabad were the worst hit with launches plummeting 73% and 79, it said.

--Dhanya Ann Thoppil

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