Demonetization: How will it effect real estate

In a rather surprising move which almost caught everyone unawares, Prime Minister Narendra Modi on 8th November 2016 made a surprising and abrupt move of demonetizing the Rs. 500/- and Rs. 1000/- notes with immediate effect. This massive step of demonetization of currency by the govt has given a huge blow to a number of sectors all across the country, none too less the real-estate itself, where even today almost a third of all transactions are still dealt with in unaccounted money. The ones who have been hit the hardest are most definitely going to be the land-brokers. Already reeling under the garb of the much maligned recession, this particular sector may yet need close to 12 to almost 24 months to recover from the already sudden downward spiral in prices. Now after this sudden move, it surely means that there would be even further more delays in under construction and ongoing real estate projects due to the massive cash crunch in the sector.

Most effected areas:

The biggest effect of this slowdown owing to the recent announcement has been felt most severely in NCR particularly Gurgaon, the whole of Mumbai Metropolitan Region (MMR) and certain Tier II markets such as Surat and Vadodara. A lot lesser yet significant impact of the same has also been felt in relatively smaller markets such as Bangalore, Pune and Chennai, which are primarily more inclined towards being end-user driven and rely a lot more on bank funding.

Is the effect positive or negative:

While it has been bad news for the builders all along, at least there’s also a silver lining for the buyers here. Sure enough, the projects are bound to be delayed, which in turn means even further delay in handing over the possession to the buyers. Particularly in the immediate aftermath, this decision will also mean that it will be extremely difficult for any buyer to pay in cash simply for the reason that the seller will also not accept such money. This will ensure that automatically the property prices will take a huge nosedive. Right in the initial stage of any real estate project, it’s the land purchase that constitutes the highest component, close to almost 40% of unaccounted money. There is also a cash component of 20 to 30 % in property transactions, owing to the massive difference between the collectorate rate and market rate of property which will be affected. What the step of demonetization will do is to pave the way for a much cleaner and also a lot more transparent real estate industry in the future. It’s a foregone conclusion that the builders will now have to look for other alternate funding arrangements while end-users or investors will also wait for more certainty before taking any further steps. This would mean that the real estate prices will be regulated and corrected since a major portion of unaccounted cash in form of black money will be flushed out of this market. Real estate has contributed to a major chunk of the GDP (close to 11%) yet the amount of black money in this sector amounts to about a whopping 50%. The GDP, as a result is bound to be higher now.

Also, due to a number of reasons, namely tax holidays and foreign investments, people would often buy properties in bulk and then end up selling them at much higher rates. It will no longer be the case, as a result of which inflation in this sector would be reduced to a greater degree. With the investments being legal, it would also mean registration records will have to be maintained for all projects. All these changes will most certainly stabilize the market prices of the properties in the long run and bound to benefit buyers who are willing to show patience. All in all, it has been a well calculated gamble by the government as well as a massive step forward, one which is unprecedented and much needed at the same time. It might feel like a risky move but could well end up shaping the better part of the century. Cash free is the way going forward.

Sakshi Saran is based out of Noida & has studied Business Law, LLM-Master of Laws from Year 2014-2015 in AU-Amity University, Amity University.

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