Demonetization- A Shake up for Realty

20/01/2017 , by , in News/Views

Demonetization –A Shake-up for Realty

The real estate sector has been going through and with the demonetization announcement the sector is already finding it difficult to cope up with the unsold inventories.Rahul Trivedi examines the effect of demonetizationon the real estate sector.

The infusion of black money in realty sector can’t be denied. A report by Liases Foras stated that about 30 per cent of all property transactions in the year to June 2012 were in black. In 2012, Finance Ministry released a white paper on black money stating that real-estate sector in India constitutes almost 11 per cent of the GDP; whereas a recent report by Ambit Capital said that India’s black economy stands at over Rs 30 lakh crore or about 20 per cent of the total GDP. So, now if the ministry’s 2012 report still holds its relevance then the real estate accounts for more than 50 per cent of the current black money market.

Impact on the Sector

The demonetization drive is being seen as an antidote to the black money. And there is no denying that the realty sector has a high engagement of black money and cash dealings.This move will extirpate the fly by night or self-claimed developers from the sector that used to deal majorly in cash.

The primary market of projects undertaken by tenable developers will not be affected much, as buyers of such projects go for home loans and the transactions are through legal channels. It is the secondary market or the re-sale market and the luxury residential segment where the cash dealings are high , that will take a big wallop.Experts are of the opinion that there will be around 25-30 percent of deterioration in the prices in luxury segment as sellers will struggle to disgorge properties to generate liquidity. Though, this brings good news for the home buyers as they will now suddenly have a much wider bandwidth of options to choose from.

A likely side effect of the move is a down ward pressure on the interest rate structure. This would ease the housing loans interest rates. HFCs and banks expect the average size of home loan will increase as the share of cash component in property deals comes down.

No change in Prices

After the announcement to ban the denomination, there were speculations that the prices of the properties will come down to 20 to 30 percent, but that won’t be the case. Experts say that the property prices are already at the all time low and there is hardly any scope of downfall. Also, the price of the property depends hugely on the cost of raw materials which is not going down and is  likely to increase in future.

However, as much of the unaccounted money in India is held in the form of real estate thus, the Benami Act and demonetization move will have significant effect on volume and transactions in land buying. Once the land prices witness a fall, this may have a ripple effect on housing prices.

Rise of Rental Segment

The real estate sector has been trying to overcome the sluggish sales in last few years. Now the end user, in hope of price correction, would wait for the right time to buy a home and opt for a rental place.Recently, the rental market across the country has seen a growth of around 12 percent. The residential market of Delhi-NCR region has witnessed a phenomenal growth of 15 percent. This growth in the rental market will also witness a growth in the rent of the residential property.

The real estate sector has seen some positive changes in the form of passing of RERA, Benami Transactions Act and now the demonetization drive. All these initiatives will guarantee a much transparent and organized sector.capable of long periods of sustained growth.

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