Notes ban to sooth property prices, impact developers: Fitch

New Delhi: Prices of residential properties will fall and real estate sector will face the negative impact of demonetisation of Rs 500 and Rs 1,000 notes over the next 1-2 years, Fitch Ratings said Thursday.

It said the negative impact is likely to be more pronounced on sales of higher-end, premium property which is targeted by high-net-worth individuals and investors, rather than entry-level housing targeted by first-time homebuyers which are more often purchased by salaried individuals with limited undeclared income.

"Indian government's recent move to demonetise currency notes of higher denominations is likely to have a negative impact on homebuilders, at least in the next 12-24 months. We expect residential property prices and property sales to fall, as consumers attempt to work out how best to declare their wealth," Fitch Ratings said in a statement.

India has a significant cash-based economy, and therefore considerable undeclared income in circulation, and the government's move is likely to severely curtail the use of any undeclared income which is usually retained in the form of cash or invested in property and gold, it said.

"Therefore homebuilders with greater exposure to large- ticket premium property projects are likely to be the most affected. Furthermore, we expect homebuilders more exposed to projects in the National Capital Region (NCR) to be hit more than in other regions, because NCR is known to have a greater reliance on cash-based transactions," it said.

People having invalid notes of Rs 500 and Rs 1,000 denominations are required to either deposit them in their accounts or exchange them with new currency notes. Banks have already started issuing new currency notes of Rs 500 and Rs 2,000 denominations.

Fitch said the negative impact on cash collections of homebuilders such as Indiabulls Real Estate Ltd and Lodha Developers may be slow initially, because a considerable portion of their cash collections in the next three to six months is likely to stem from previously sold properties.

"However risks to these companies may increase, as consumers are likely to take more than a few months to adjust to the new environment. The pace of project execution across the wider real-estate sector may also experience a slowdown at least until the industry adjusts to the new paradigm," it said.

Project executions may be slower - particularly for new and existing projects that have a significant number of pending regulatory and local government approvals.

"However, we expect that the curtailing of undeclared wealth in the economy will be supportive of the real-estate sector over the longer term, as it is likely to improve affordability and bring about greater transparency."