In a surgical strike on black money, the Government of India, on Tuesday 8th Nov., announced that Rs. 500/- and Rs. 1000/- notes would no longer be a legal tender. This is a great step in curbing black money. This is likely to hit the real estate sector hardest. Land and real estate transactions are mostly done in cash.
This bold move of Government has suddenly cut off the supply of cash money from the market which was the strength and tool of real estate players. Will this affect the real estate sector? How will it affect the prices of land and flats across India? Will it affect the ongoing projects as well as projects in the pipeline? How this will affect the property transactions, that are done but yet to close? What will be its short term, medium and long term effects?
The ET realty.com has published a beautiful article, explaining all such queries with the opinion of real estate sector’s experts.
NEW DELHI: The government’s decision to ban Rs 500 and Rs 1,000 currency notes will help curb unaccounted-for cash in the real estate sector and is a major step towards increased transparency in the sector, say real estate developers and experts.
While small and unorganised builders and secondary property market, especially in the high-value segment, are expected to be adversely impacted, the primary market and the affordable housing segment may not see a major impact.
Home and land prices could witness downward pressure, which would in turn help revive demand in the sluggish housing segment, they added.
Here’s how the industry participants reacted:
Niranjan Hiranandani, CMD, Hiranandani Communities and Founder-President NAREDCO (Maharashtra)
This effectively is a major assault on black money, fake currency and corruption, is good for the economy and real estate – we welcome the move, said
“For Indian real estate, the Narendra Modi Government’s moves on RERA and GST were aimed at bringing in transparency and rationalise taxation, but this move – demonetisation of 500 and 1000 rupee notes – is clearly one that will fight black money, corruption and terrorism. It will not just ensure more credibility for the industry, but also in effect, make Indian real estate more attractive to global investors,” he concluded.
Getamber Anand, President, CREDAI National
Effectively the primary market will not be very disturbed as the inventory was sold to end users who avail home loans. Moreover, the organised part of the RE industry has always been compliant and it is only the unorganised fly by night players who will be affected. This move will help the 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.
Parveen Jain, President, NAREDCO
It is a very good move by Modi Govt as this step will help in keep a check on the illegal black Money movement. If we talk about real estate sector affordable and mid-housing segment will not affect as these transactions are primarily routed through bank borrowings.
Abhishek Lodha, Managing Director, Lodha Group
We heartily welcome this path-breaking step by our Hon’ble Prime Minister. It will radically transform our economy and prove that India is, in fact, a much larger and stronger economy than what is normally understood by GDP figures. Reduction of cash will place India in the same league as the more developed countries and make our economy more efficient in the long run. The professional, well-organised companies in the real estate sector will significantly benefit from this move and the scourge of black money will eventually vanish from the sector and the overall economy. This will also strike at the roots of terrorism and corruption and in doing so, strengthen our nation.
Over the next 12 months, a lot of money will flow into financial instruments and hard assets like real estate, since people will be encouraged to disclose their earnings willingly. This is likely to improve liquidity and lowering interest rates, all of which will help boost the economic growth. As the Hon’ble Prime Minister said, there may be some short-term pains, but it will be hugely beneficial in the medium term.
Vineet Relia, Managing Director, SARE Homes
This is a very bold move taken by the government and we truly support the decision of moving towards the cashless economy. The move will have a major impact on secondary sales, especially in the high-value segment. We feel that RERA plus this move will heap huge benefits in the long term. In the short term, there will be cash flow issues and primary sales originating through migration of customers selling older family homes for new properties will get affected. This move will also enhance the confidence of global investors looking at large investments in the real estate sector.
This is a bold step taken by Hon’ble Prime Minister Shri Narendra Modi, and should have a comprehensive impact on the overall economy. This move, along with RERA norms, will bring long-term fundamental changes in the Real Estate sector which is also set to gain from the increased transparency, and organised developers such as Emaar and others will be leading the way to this change. This would also present a good opportunity for home buyers to buy their dream homes, thereby boosting the overall market sentiments. We believe that in long-term, this is a positive development for the industry.
Shishir Baijal, Chairman & Managing Director, Knight Frank India
The broader effects of this move will help the sector grow in the long run. Firstly, it will create a level playing field amongst all stakeholders in the sector. Institutional funding to developers which till the present day came with a higher risk weightage is bound to see some softening with the increased transparency. 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, a number of transactions and prices in residential and land markets seeing a substantial downward trend. The impact will be felt across the board with tier-II and tier-III market taking a larger hit. However, RERA, GST, Benami Act and this recent move will prove to be a game-changer for this sector and next year this time the real estate sector will be a totally different industry – a more evolved, transparent and a corporatized one!
Ashish Sarin, CEO, Alpha Corp
There is a widespread corruption in the system and the government had to take stern measures to weed out corruption from the grassroots level. Hon’ble Prime Minister’s move along with bringing transparency in the sector would also be instrumental in easing up the approval process. Demonetisation of Rs 1,000 and Rs 500 notes would be instrumental in eradicating black money out from the transactions and will strengthen the banking channel as monies will get into the banking system. The move, however, would impact the unorganised real estate players and the market will see the correction in the short run but in the longer run, it will benefit the overall real estate sector.
Anuj Puri, Chairman & Country Head, JLL India
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 unorganised 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.
Anshul Jain, MD – India, Cushman & Wakefield
The government’s move to demonetize INR 500 and INR 1,000 is a bold and perhaps, the final step after the expiration of the ‘Income Declaration Scheme’ on 30 September 2016 to curb black money in the country. The Indian real estate market, which is largely fragmented and unorganised, has had a reputation of being a safe haven for black money and therefore we expect to see an impact on the sector. The impact is likely to be seen in secondary markets for all asset classes thereby making real estate more illiquid for a period of time till the market adjusts to a new normal. The primary market which is largely driven by large developers is unlikely to get affected that much as most large and reputed developers already do not deal with cash transactions. In the short term we are also likely to see an impact on general liquidity in the market and therefore working capital needs for small and medium developers and other businesses will be lot higher.
This measures to curb black money may be drastic but will further increase transparency and credibility in the sector, at a time when the setting up of a Real Estate Regulatory Authority (RERA) in each state is set to bring in increased accountability in the markets. We can expect to witness some amount of correction in real estate prices in markets where substantial speculative investments have been made by individuals through their black money but these are unlikely to be dramatic and limited to certain pockets.
Anshuman Magazine, Chairman – India and South East Asia, CBRE
It is a bold move. While it may cause some pain in the short-term, the long-term outlook for the industry looks positive. 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 RERA Act and GST, to REIT—combined with this announcement, will further improve transparency and increase investor confidence in the real estate market in the long run.
Sachin Sandhir, Global Managing Director – Emerging Business, RICS
Traditionally, the preponderance of ‘black’ or unaccounted for monies in real estate – largely by way of cash transactions is seen in secondary market transactions and supply chains related to primary markets viz. land, material, labour etc. Secondary markets would be affected as unaccounted cash payment would no longer take place leading to some dips in sale process for assets that are sold or purchased in the short term. However, with progress of time, it will not be surprising to see prices go up as sellers come to terms with the fact that capital gains tax has to be paid on monies. Sellers are likely to factor that liability into the sale price.
A closer look at the primary market would indicate that there are several components of informality within the production chain – such as purchase of land for onward development of a project. Twenty-four (24) hours earlier, a landowner could enter into an agreement with a developer where part of the consideration paid would be unaccounted. Now, since the landowner can no longer do that – he would either sit out on the land, stalling the entire development project, or charge a higher premium to maintain the same cash margins after tax. The same principle also works between developers, contractors and sub-contractors. All of this included, the input costs of developers will go up, and the only way then can respond will be by raising prices – which will affect a market already strained.
Akshay Chudasama, Managing Partner, Shardul Amarchand Mangaldas & Co
There will be a considerable short term impact on the residential market and in the purchase of tracts of land, but this is an extremely positive step for the real estate market in the long run. Coupled with RERA end consumers will eventually benefit from this move.
Jayashree Kurup, Head, Editorial and Advisory, Magicbricks.com
We welcome the bold decision made by Prime Minister Narendra Modi to withdraw Rs. 500 and Rs 1000 denomination currency notes from midnight, yesterday. This is a tremendous step towards increased transparency in the Indian real estate industry, which has been reeling under the negative impact of black money and corruption. Coupled with RERA and the Benami Transactions (Prohibition and Amendment) Act, the effects will be far-reaching and reform the sector in no uncertain way. While in the short term, the markets could be impacted with cash flow issues would affect some sales, however in the long run it will have a positive effect on sector , bringing in more credibility and making it more attractive for serious investors, including foreign investors. It will help make the transition from an investor driven market to a user governed market, with clear ground rules, creating a win-win situation for all stakeholders.
Sahil Kapoor, Executive Director, RE/MAX India
It might just result in sentiment setback for a while but it will ultimately prove to be one of the best decisions for long term growth and sustainance of this industry. The industry will move towards transparency and professionalism and serious and clean players will reap the benefits. The prices will become more affordable for end users and there will be no reasonable correction. It should be an opportunity for people to buy their dream home. I understand that there is a state of panic and unrest among the few in this sector but the ones with clean business are very excited that industry will turnaround and become more organised and transparent. Organised and large players like RE/MAX will welcome this move with open arms and reap maximum benefit out of it”.
Pankaj Bansal, Director, M3M Group
PM Modi’s major structural coup is bound to ensure boost in economy in the long run and will lead to an improved transparency in all the sectors including real estate. The surgical strike on black money would crash inflation which would benefit the genuine buyers. The move will bring in more transparency in the financial system of the country which will allow India’s GDP to flow through the digital pipes thereby improving the digital economy. This decision is positive for the end users looking to buy their dream homes. Also with the implementation of Real Estate Regulatory Act (RERA) the sector is soon going to cleanse as well as boost India’s image globally. PM Modi has rightly stepped forward for the welfare of the people as well as for the nation’s growth.
Munish Doshi, MD, Acme Group
This is a big leap forward for a truly digital and modern economy to emerge, given that housing sector itself contributes 5-6% of India’s GDP. The professional realtors have anyways been selling property in cheque payment only for more than a decade now. If anything, this move will bring in more professionalism and organization in the sector. There are many onetime businessmen becoming part time Developers – using cash to develop/construct a single stand alone buildings since they could deal in cash. The quality and security of such constructions are questionable. Now that this won’t be possible, we will only see organized and professional developers who are anyways favoring cheque payments growing further. It is encouraging. However in all, the organized Developers affiliated with MCHI-CREDAI will benefit in long run – although there will be a little hurdles in the sentiment of flat buyers in short run – in long term for the Real Estate Industry this is a welcome move. Even The Real Estate valuations will also see a correction now.
Rohit Gera, Managing Director, Gera Developments & VP, CREDAI – Pune Metro
The move by the Prime minister to ban 500 and 1000 rupee notes to eliminate corruption and black money is a fabulous move. The impact of this will be huge in many markets where payment of cash is mandatory and the major form of profit taking. These markets will see a major crash making an already difficult situation even more challenging.
In addition to eliminating black money this will definitely bring down corruption at least for a while. In the medium to long term the policy that emerges will determine how much corruption will return in due course.
Rattan Hawelia, Founder & Chairman, Hawelia Group
This is a big welcome decision and it will promote cashless economy. It will bring transparency specially in purchase of lands. Government’s decision will help putting an end to bribery in the system and use of black money. It will have impact on unorganised fly-by-night players but the end users will be benefited. Now mostly transaction will happen through banks and there will be stability in real estate.
Jason Kothari, CEO, Housing.com
Housing.com has always batted for increased transparency in the real estate sector and therefore, we welcome prime minister Narendra Modi’s decision to ban Rs 500 and Rs 1000 notes. Cash transactions or black money deals have plagued the sector for a long time, sometimes even accounting for up to 50% of transactions. This move, combined with the Benami Property Act which became effective on November 1, will help weed out corruption and black money to a large extent, from the sector. The organised segment of the market shouldn’t be majorly impacted since most homes are now bought by end-users who avail home loans. The unorganised segment which relies mostly on cash transactions, will be impacted significantly however. While this will slow down the market in the short-term, it will make India’s real estate sector more transparent and organised in the long-term, which in turn, will attract more funds, both, domestically and internationally. This is a bold and exciting development for Indian real estate.
Dhruv Agarwala, Chief Executive Officer, PropTiger.com and makaan.com
We don’t see an immediate fall in land prices, but transactions will certainly freeze. The overall decline in land prices will have a cascading effect. I shudder to think of developers who have a huge pile of inventory, they will be in deep trouble. Eventually, they will have to reduce prices. However, This is a fantastic move to bring sanity and transparency in the real estate sector. There will be a lot of inflow of foreign capital, because land prices will come down. But, more importantly, ‘Housing For All’ would finally become a reality, as cheaper land will eventually translate into cheaper homes. While there will be short-term pain, but in the long-run, the real estate sector will benefit fundamentally.
Samir Jasuja, founder and CEO, PropEquity
This is a game changer move which will deeply impact Indian real estate sector especially in the resales of ready residential properties. There is always certain unaccounted cash percentage in the range of 10-50% of any sale of property in India which was making the real estate market volatile. In the short-run, there will be pain as it will impact all real estate deals, we expect price corrections of anywhere between 10-20 per cent depending on the micro markets. However, in the long run this unexpected move will make the property sector much more transparent, clean and organised. This will help in attracting more clean investments in the sector, both from domestic and FDI
Rajesh Krishnan, MD & CEO, Brick Eagle Capital Group
This is a very bold and commendable move by PM Modi. The real estate sector will definitely be impacted and we can expect upto 30% drop in land and property prices over the next 12 months. However, this is great news for the affordable housing sector. Cash component in affordable sector is typically minimal as buyers require home loans for upto 90% of the property price. Hence demand in the affordable housing sector will not be impacted.
Manju Yagnik, Vice Chairperson, Nahar Group
This is a bold and positive step taken by the government which will have a major impact on the real estate sector. This is in pursuant to the policies initiated by the government in bringing more transparency in property dealings, confidence building measures for home buyers and creating a positive environment for the industry at large. Home buyers will now be able to evaluate more realistic pricing of property. It will separate wheat from the chaff; clear off any uncertainty and increase buyer confidence. It will provide well renowned realty brands a level playing field to operate in. Though this may cause inconvenience to people in the short term it will immensely benefit home buyers and the real estate sector in the long term.
Ashwin Sheth, CMD, Sheth Corp Ltd.
The real estate sector is in a revival mode and already the implementation of RERA has brought a lot of confidence amongst the buyers. Investments made with unaccounted wealth will be eradicated bringing transparency in the sector. Further, this move by the Government will now help to curb many inconsistencies and unfair trade practices bringing professionalism in the sector. Reputed builders would not feel the pinch as they have been making use of bank channels for transactions. With the RERA Act and the demonetization of the 500 and 1000 currency notes we can expect to witness positive reforms and sales growth in the affordable housing sector. This is a win-win situation for developers and home buyers.
Ricky Doshi, Founder & CEO, ARD Studio
Demolition of the currency notes of Rs 500 & 1000 is a major decision and will bring about a huge impact on the construction industry as well. The realty prices will witness a significant drop. This initiative by the Modi Government will aid in bringing a transparency in the real estate industry, thus, we will be seeing a more controlled and regulated growth. The consumers will be highly benefited as there will be an end to corruption within the government departments as well.
India Ratings and Research
The real estate demand from end users is unlikely to be impacted, since a majority of them are backed by funding from bank loans. Demand from investors for real estate however may come down since in some cases investors prefer cash transactions. Much of the investor demand is in relatively higher value transactions of above Rs 10 million, which may now see lower demand. If the proportion of earlier transactions in the real estate sector, which were allegedly done through partial cash payment, reduces, the registered prices of real estate will go up. Ind-Ra expects the supply of real estate in the secondary market, which is strongly rumoured to have a large cash component involved, to suffer in the short term, which may in turn improve demand for residential real estate in the primary market.
Akash Kapoor, Director, Elan Group
The surgical strike on black money is PM Modi’s strong step to curb corruption that has been plaguing the Indian economy for a long time. The decision is going to profit the consumers in a huge way as the prices of various commodities will fall drastically. Subsequently, It is a positive development which will eventually contribute to the growth of the country and will boost the digital economy. Most importantly the fall of the parallel economy will facilitate cash generation and we are hopeful that the interest rates would be lowered, this subsequently would have a positive impact and people will definitely invest in real estate. We are anticipating a major boom in the real estate industry with RERA setting the transparent tone. The step taken by PM Modi is highly commendable and will surely receive a positive response from all the sectors of the society.
Sumit Berry, Managing Director, BDI Group
The Modi government’s bold step on banning the higher currency would lead to the country’s economic development and also have a widespread impact in the real estate sector. This decision will surely have a positive impact on real estate as well since the primary transactions are via home loans.The buyers are surely going to benefit from it as this will give them an opportunity to buy their dream homes. In the long term this decision would strengthen our nation’s economy.
Bharat Dhawan, Partner, Mazars
The move is expected to further create a downward pressure on the prices, making the houses affordable. Thus the biggest gainer of this will be the home buyers for whom owning a house was largely a dream due to unaffordability. Curbing the cash component will help customers distinguish between genuine and unreliable players, strengthening the industry in the long run. This would also help the genuine developers get finance from organized sources like banks, reducing their interest costs and improving their financial viability. Thus making the industry more transparent in the long run.
We expect this move will aid the Real Estate Regulatory Authority (RERA) regularize this industry and help all the parties involved. The move will rationalize the industry, correcting the prices in the short term thus helping the buyers. In the long run it will wade out the unscrupulous developers and middle men, strengthening the industry.
Nirav Maniar, Head – Regulatory and Assurance Practices, International Business Advisors
Real estate sector has always been touted as the major contributor and consumer of black money. Right from land acquisition to obtaining completion certificates, overall corruption affects the entire construction process and consumes large amounts of cash which at times exceed half of the property value. With majority of cash getting sucked out of circulation, the already reeling sector will feel more heat in the coming months. Secondary market transactions will be more impacted as they are the ones with cash component built in to avoid tax. However the impact may be short lived as parallel economy will start rebuilding and unless enforced properly, desired results will not be maintainable.
Arjun Basu, CEO & Co-Founder, Doorkeys.com
This is a powerful and bold move by the Modi government. The real estate sector will finally be moving towards transparency in transactions. The secondary market will bear the biggest impact of this war against black money. The market was already in distress with a massive inventory overhang, and sellers are looking at the liquidation of their inventory at the earliest. This will benefit the consumer as the price for secondary or pre-owned properties are bound to spiral down. This will lead to more aggressive negotiations but also greater scope for transparent transactions. We laud this development.
Digendra Singh Rathore, Co-Founder & CEO, Fella Homes
The decision to make currency notes of Rs.500 and Rs.1000 void is a big leap for the transparent and legitimate financial transaction in the future. This will surely be a hassle in the short term but the benefits will overshadow these hassles that we would be facing today. Real estate and its home rental market are steeped in transactions being done in cash only but with the technology enabled property management companies’, Fella Homes, we are in process of making all these transactions transparent and do our bit in the development of the economy. The effects of this decision would reflect soon as the real estate market won’t be bundled with black money and actually seen as a legitimate investment, hence boosting the growth of the sector.
Neha Hiranandani, Director, House of Hiranandani
This is a bold and progressive move by the government and in our view will be far more effective than RERA and other statutory impositions placed on the sector in weeding out corruption. Layers upon layers of statute breed inefficiency and give way to corrupt practices. This is the move we have been waiting for.
There will be a lot of short term pain and confusion, but we feel confident that these kind of policy directives will move India into a new era.
Source: ET realty.com