The move to demonetise Rs. 500 and Rs. 1000 currency notes has come as a shock to most within the country. The effects, though still unfolding, are clearly visible in most sectors. One of the biggest sectors hit by the move is mostly likely real estate —a sector which has historical dealings in black money.
Real estate, especially residential real estate, trades majorly in cash which is a discreet way to save taxes on property. Such dealings in the past few years had pushed up prices to an all-time high and put houses out of reach for genuine buyers.
The Real Estate Regulatory Act (RERA) passed by the government in 2015 as well as the Benami Act passed recently eased the market a little in late 2015 as prices stabilised and circle rates were increased in critical areas. The recent policy for demonetisation though seems to have hampered the progress, at least in the short run, with a sudden drop in prices. This has led to developers holding on to inventory and sales not coming through. Experts say that since demonetisation, sales have dropped by 50-60%.
Outlook spoke to two leading experts in the field —Anuj Puri, the chairman and head of JLL India, and Anshuman Magazine, the chairman of CBRE India and South-East Asia on the short- and long-term effects of the move on the real estate market.
Anuj Puri, Chairman and head, JLL India
On Short-Term Effects
The main effect has been seen in the resale segment of the residential property market in larger metros. This segment has historically seen the highest incidence of cash components. The primary sales segment has been impacted in tier 2 and tier 3 cities, because many smaller developers in such cities accepted large cash components as part of their transactions.
There are currently a lot of numbers floating around with respect to the impact of the demonetisation on the sector. It has been only a month since the move, and hard, reliable figures will only be available in the next few months.
On Long-Term Effects
Secondary sales of residential apartments have reduced since the policy announcement. Land prices will plummet in the next few years, especially in tier-II and tier-III cities, as also the fringe areas of metros. This should bring residential apartment prices closer into the range of affordability for many people across India.
As a next step, circle rates need to be made dynamic so that they are marked to the market price. Circle rates are the minimum value at which the sale or transfer of a plot, built-up house, apartment or a commercial property can occur, usually set by the state government’s revenue department or the local development authorities. This will reduce the difference between reported rates and transacted rates.
On Benami Act
The Benami Act will make it even more difficult to park unaccounted wealth into real estate going forward. The luxury properties segment is also seeing a negative impact, since this segment has been defined by significant cash components in the past.
We will hopefully see a much-needed cleansing in the real estate sector. The success of the amended Benami Transactions (Prohibition) Amendment Bill will lie in its quick and strict implementation by the empowered authority. This Bill, together with RERA, has the potential of significantly cleaning up the ambiguity, clutter and opacity on the Indian real estate market.
Anshuman Magazine, Chairman, CBRE India and South East Asia
On Short-Term Effects
This move is likely to exert downward pressure on capital values, which is expected to result in increased affordability (particularly for the housing sector) in the long run. Further, there might also be liquidity concerns for the real estate and construction sector, especially when it comes to smaller development firms (mostly unlisted). The liquidity stress is likely to result in delays in construction in the short to medium term.
Expected Changes in Long Run
While it may seem chaotic initially, in the long run the move is likely to prove structurally positive for the real estate sector. It certainly helps that the real estate industry has already moved towards transparency in its operations. Several steps taken by the Government in recent times—from the Real Estate Regulatory Act (RERA) and the Goods and Services Tax (GST), to REITs—combined with this announcement, will further improve transparency and increase investor confidence in the real estate market in the long run. This will be a landmark decision in imposing the much needed transparency in real estate transactions, particularly in the housing sector.
On New Launches
In the short run, there might be liquidity concerns for the real estate and construction sector, especially when it comes to smaller development firms (mostly unlisted). The liquidity stress is likely to result in delays in construction in the short to medium term. However in the long term, this will further improve transparency and increase investor confidence in the real estate market.
Credits Outlook India