With at least 30-40% transactions, particularly in the resale housing market, paid for in cash, the real estate sector will take a hit and prices are likely to plummet following the government’s move to step up its war against black money by de-monetising Rs.500 and Rs.1,000 notes, say experts.
“You may yourself have experienced when buying land or a house, that apart from the amount paid by cheque, a large amount is demanded in cash,” Prime Minister Narendra Modi said in his dramatic late evening announcement Tuesday while referring to the sector notorious for being a wealth creating machine and a parking place for black money.
The decision to withdraw Rs.500 and Rs.1,000 notes from the market will have a profound impact on business in the housing sector, affecting both builders and potential investors, say analysts.
If a house is registered for Rs.40 lakh, for instance, and its sale value is raised to Rs.60 lakh, the extra amount of Rs.20 lakh has to be paid in cash. But it will now be difficult to sell the house at Rs.60 lakh because no one has Rs.20 lakh to pay as kachha (cash). Prices will, therefore, crash as the cash component is gone. Finance Minister Arun Jaitley said as much on Wednesday when he declared that “real estate will become more affordable now”.
Looking at the road ahead, Sanjay Sharma, founder of Qubrex Realty Exchange, added, “It is not expected that the demonetisation of large denomination notes is going to have a significant effect in reviving the real estate market. What may happen is that the sellers may pause till they find out how they can make sales while minimising tax burdens on payments received.”
Now, the number of investors as buyers will decrease as they will neither be able to park their black money in real estate in the short to medium term, nor get high tax free profits as they were earlier. The most important factor is that investors will now focus more on sustaining their own business demands rather than opting for real estate investment opportunities.
It will be equally painful for builders, some of whom got approvals despite shortcomings in their projects and questionable benefits in terms of saleable areas for which black money was a lubricant. Buyers also parked black money with builders who had huge expenses where they could absorb the cash. But the builders’ pile of cash is at risk of becoming worthless now.
Black money transactions were rampant in tier 2 and tier 3 cities as well with the gap between market rate and circle rate and a significant number of people using the sector to absorb their unaccounted for money.
“Prices coming down to more reasonable levels in the residential property market cannot be ruled out. In the immediate future, the sector will be under serious pressure with volume and number of transactions in residential and land markets seeing a substantial downward trend. While it cannot be denied that the impact of this move will be felt in primary markets, secondary markets along with tier 2 and tier 3 cities will also take a hit,” said Shishir Baijal, chairman and managing director, Knight Frank India.
The other view
Not all in the industry feel that the government’s latest move will make a drastic difference. “For big players and for all companies the move may not make any big difference, as long as they carry out their transactions through banking channels. Only those, who do not, will be impacted,“ said a spokesperson for DLF.
“It is a bold move. While it may cause some pain in the short-term, the long-term outlook for the industry looks positive,” added Anshuman Magazine, international real estate consultant and chairman, India and South East Asia, CBRE.