Market in Depth

India’s property market quickly recovering following demonetization

May 18, 2017

Not as bad as was feared, is the verdict.  Aimed at discouraging tax evasion, the Indian government’s dramatic demonetization of Rs500 and Rs1,000 notes in November 2016 effectively nullified 86% of the country’s banknotes, withdrawing US$207 billion from circulation. This move was expected to bring the property market to a standstill, as home buyers typically pay 30-40% of a home’s value in cash and the practice of paying for properties in cash to avoid taxes is pervasive.

But fears of a post-demonetization property slump have dissipated, with demand already picking up.  Sales across India’s top 9 cities increased by 19% to 51,715 units in the January-March 2017 period compared to a fall of 20% the previous quarter, according to real estate advisory firm PropTiger.

This is not to say that demonetization didn't deliver a considerable shock to the economic system.  It certainly did.  And not only in real estate, but right through the economy and even abroad, as Indians with 'surplus cash' sought to move money offshore to the traditional Indian bolt-holes such as Dubai and Mauritius. Indeed one of the most obvious results of demonetization may be an increased appetite by Indians for foreign assets, foreign investments, and foreign properties.

In the weeks following the implementation of demonetization there was a lot of uncertainty and a significant real estate slowdown.  In the final quarter of 2016, India’s eight major cities registered a 44% drop in sales volumes y-o-y, to the lowest level since 2010.  In contrast the first half had seen more than 135,000 units sold, a 7% increase y-o-y, according to Knight Frank. In the third quarter, sales had also held up, with around 67,000-68,000 units sold on the back of the festive season.

After demonetization “those who were looking to buy property as an investment vanished overnight from the market after the cash ban,” says Aubrey Carvallo, a Mumbai broker who has never seen demand in Mumbai so low in his two decades of working in the industry.

However since then there has been a clear recovery.  Already the inventory overhang has decreased. During Q4, it fell from 46 months to 38 months. New launches increased by 19% to 51,500 units, the highest in the last eight quarters, according to PropTiger. Of the total, 26% were in Mumbai, 14% in Hyderabad and 13% in Gurgaon. More than half of the sales came from the markets of Mumbai (23%), Pune (18%) and Bangalore (16%).

There has been a shift in buyer's preferences towards ready-to-move-in projects.  Realtors were receiving inquiries and bookings in March 2017 even though it is the last month of a fiscal, when demand is usually subdued. 

A large part of the recovery is being driven by the affordable housing segment whose share of total launches rose 22% owing to its recently received infrastructure status, according to Anurag Jhanwar, Business Head (Consulting and Data Insights) of

This is echoed by Samantak Das, Chief Economist and National Director for Research at Knight Frank, in an email interview, saying, “Developers are focusing on affordable housing projects to benefit from the attention that even government is providing to the segment. Accordingly, lower size apartments and shrinking apartment values have also seen great interest.”

According to a PropTiger report, prices have remained range-bound in Q4 in the top 9 cities, with marginal annual appreciation between 1% and 3%.  During the year 2017, according to PropTiger:
  • Hyderabad witnessed the highest increase at 5% q-o-q to Rs3,970 (US$62) per sq.m.
  • In Bangalore, prices rose by 3% q-o-q to Rs4,822 (US$75) per sq.m.
  • In Chennai, prices rose by 3% q-o-q to Rs5,044 (US$78) per sq.m.
  • In Ahmedabad, prices rose by 1% q-o-q to Rs2,942 (US$46) per sq.m.
  • In Gurgaon, prices decreased marginally by almost 0% to Rs5,318 (US$83) per sq.m.
  • In Mumbai, prices decreased by 1% to Rs8,153 (US$127) per sq.m.
  • In Kolkata, prices decreased by 2% to Rs3,822 (US$60) per sq.m.
  • In Pune, prices decreased by 2% to Rs4,774 (US$74) per sq.m.
  • In Noida, prices decreased by 3% to Rs3,965 (US$62) per sq.m.

Analysis of India Residential Property Market »

Rental Yields

India's residential property yields still low

Residential property prices have risen strongly in India in recent years. Rents have not kept pace, so it is hardly surprising that the gross rental yield - i.e., the percentage return on your purchase of property - is low in India's major cities.

South Mumbai has very low rental yields, with property investors earning around 2.40% gross. Apartments remain expensive. In US$ terms they are less expensive this year than last, reaching about US$9,800 per square metre (sq.m.) for 120 sq.m. apartments.

In New Delhi, prices per sq. m. are of course much lower, despite the continuous price rises in that city. In 2016, the price per sq. m. of a 120-sq.m. apartment in New Delhi was around US$3,350. Gross rental yields in Delhi remain poor, at between 2.88% to 3.20%.

In Bangalore, prices are around US$1,000 to US$1,200 per sq. m. Rental yields are higher in Bangalore, ranging from 3.33% to 4.04%. Again, this is a long way below the nice yields of 7.16% to 9.92% which could be obtained way back in the year 2007.

Conclusion: Indian gross rental yields are very low. This suggests that Indian residential property is somewhat overvalued. While low rental yields do not always indicate over-valuation, especially in periods when interest rates are low, they are only justified if rapid economic growth is expected, and also, if there are sufficient restrictions on new building to prevent the market being flooded with new properties as prices rise. The buyer must ask himself whether these two conditions are met in India.

Round trip transaction costs are moderate to high in India. See our Property transaction costs analysis for India and Property transaction costs in India, compared to the rest of Asia

Read Rental Yields »

Taxes and Costs

Rental income tax is low to high in India

Rental Income: Net rental income is taxed at progressive rates, from 20% to 30%.

Capital Gains: Capital gains are taxed at the standard income tax rates.

Inheritance: No inheritance or gift tax is levied in India. But a wealth tax of 1% is imposed if the net wealth exceeds INR10 million (US$147,059).

Residents: Residents of India are subject to tax on their worldwide income at progressive rates, from 10% to 30%.

Read Taxes and Costs »

Buying Guide

Buying costs in India range from low to high

Total roundtrip transaction costs, i.e., the cost of buying and selling a property, are between 8.75% and 15%. Stamp duties and registration fees vary according to city and locality.

Read Buying Guide »

Landlord and Tenant

Pro-tenant laws in India often inhibit rental market

India colonial style housesIndian law is pro-tenant.

Rent Control: For Delhi, the maximum annual rent is 10% of the cost of construction and the market price of the land. But both construction cost and land price are based on historical values, not on the property's current market value.

Tenant Security: It is difficult for a landlord to protect his property from unwanted overstaying tenants. Though contracts may be enforceable in the courts, the enforcement process is likely to take years, or even decades.

Read Landlord and Tenant »


Indian economy's rapid growth will continue

India gdp inflationDespite the removal of around 86% of India’s banknotes in circulation, India's economy remains robust. GDP rose by 7.6% in 2016, ahead of China’s 6.7% growth. The International Monetary Fund (IMF) expects India’s GDP to grow by 7.6% in 2017, and to 7.7% in 2018, when the impact of the demonetization has dissipated and replacement banknotes have entered circulation. 

Other growth drivers are fiscal reforms, including the Goods and Services Tax (GST) which will be implemented starting July, and the liberalization of the FDI regime. The GST could help raise GDP growth rate to above 8%, according to the International Monetary Fund (IMF).

The Indian economy expanded by an average of 8.8% annually from 2003 to 2007. Growth slowed to 3.9% in 2008 but quickly bounced back the next year, growing 8.5%. Recent GDP growth rates were 10.2% in 2010, 6.6% in 2011, 5.6% in 2012, 6.6% in 2013, 7.2% in 2014, and 7.6% in 2015.

India’s labour market reflects the country’s strong pace of economic expansion and the government’s efforts in providing new employment opportunities in rural areas. The country’s unemployment rate fell by half this past year, from 9.5% in August 2016, to 4.8% in February 2017.

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