Demonetization Fallout: 20-30% Correction In Property Prices Expected
The prices of real estate is expected to dip across the Tier-II and Tier-III towns where a large chunk of the property transactions tend to involve the cash component
It's not a secret that in the deals involving the sale-purchase of plots, flats, houses and commercial property still involves a combination of 'cheque' and 'cash' component across India. The cheque component is what is often termed as 'white' or legitimate/accounted money (paid as per the prevailing circle rate) while the cash component refers to black money which is paid as the balance amount of the 'actual' deal value (which tends to be much higher than the circle rates across geographical locations).
The demonetizing of Rs 500 and Rs 1,000 currency notes is a major step in the direction of curbing 'black money'.
"A number of property transactions continue to involve the white and black components even today. Typically, such deals are 20-30 per cent higher than the circle rates. Theoretically, the demonetization of the existing Rs 500 and Rs 1,000 notes should lead to the correction of property prices in the vicinity of 20-30 per cent across property hotspots," says a senior associate in a real estate consultancy firm as his early reaction to the big news. "We will need to study the full impact of it in coming days," he adds requesting anonymity.
The prices of real estate is expected to dip across the Tier-II and Tier-III towns where a large chunk of the property transactions tend to involve the cash component.
Getamber Anand, President, CREDAI National says the primary market will not be very disturbed as the inventory was sold to end users who avail home loans. "The organised part of the real estate industry has always been compliant," Anand adds stating that it is only the unorganised fly by night players who will be affected. In fact Anand went one step further to add that with the demonetization of the Rs 500 and Rs 1000 currency notes, "this move will help industry to fight more effectively for removal of section 43CA of the IT act as now there is no reason to charge tax on so called deemed income to both the buyer and seller post this move."
DLF CEO Rajeev Talwar termed it as a "step in the right direction". "We are moving toward the cashless economy which is a sign of maturing economy. The blackmoney was mostly in land purchase. But in last 6-7 years, there has been no major land buying in this sector. Big builders and organised players are already using bank channel and they would gain from this decision. Unorganised players and the secondary market would be impacted," he said.
Asked about impact on real estate sector especially housing, Talwar said: "There could be downward pressure on prices, which will boost demand".
Explaining the impact of it on lenders, Gagan Banga, VC& MD, India Bulls Housing Finance termed the move as "very innovative" and "extremely good" for the Housing Finance Companies because the element of cash will now reduce and formal credit demand will increase.
Anuj Puri, Chairman & Country Head, JLL India said, “The banning of higher currency notes is a major move which will help curb unaccounted-for cash in the real estate sector. We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry. The effects will be far-reaching and immediate, and shake up the sector in no uncertain way. Stricter measures against black money have for long been required to help bring about greater transparency, give the Indian real estate sector more credibility and make it more attractive for foreign investors. Black money deals are more common on the unorganized market, but this practice has, in fact, been on the decrease with greater awareness on the part of buyers. Before too long, the caricatured version of black money driving Indian real estate is no longer applicable.”
According to Feroze Azeez, deputy CEO of Anand Rathi Private Wealth management, there could be a 20-25 per cent decline in residential property prices in the big cities as a result of the announcement.
Various reports suggests that there are around 7-8 lakhs unsold flats lying across the top 10 cities in India. "In all probability, many builders and property dealers holding on to unoccupied or unsold inventory may like to sell them at lower price points because the consumer’s ability to pay in white component is limited and in the absence of cash dealings, selling unsold inventory makes sense," said another reals estate analyst.
“There are eight lakh apartments in top cities that are unsold.. These buildings will now be sold at a lower price as the buying capacity with white money will be lower,” he said, adding that he expects a 20-25% decline in residential property prices in the big cities.
According to the Reserve Bank of India, there are 16.5 billion ‘500-rupee’ notes and 6.7 billion ‘1,000-rupee notes in circulation right now. In percentage terms, of the total available currency in circulation, around 80-85 per cent are in a combination of Rs 500 and Rs 1,000 currency notes. Demonetization straightaway impacts 80-85 per cent of the available currency.