Impact of Demonetization in Real Estate
The year 2016 has been very imperative in shaping the Real Estate industry with the government of India initiating some key reforms in this sector. The Major initiative being the implementation of Real Estate Regulatory Bill (RERA) on pan India basis. Other key reforms like REITs, Benami Transactions and FDIs in Real Estate. These reforms have a common agenda to bring in transparency in the Real Estate sector and help the industry become more organised and professional.
The latest “Surgical Strike” against black money is the historic Move taken by the Modi Government. The long-term impact will lead to stabilization of economy which ultimately will be in the favour of the Real Estate sector. Since this sector has significant amount of cash involvement, the impact of this government crackdown will be felt in the short term and eventually help in correcting the market sentiments. There is undeniable truth that there is 20-30% of cash component involved in the real estate transactions due to the disparity between the circle rate and market rate.
The ratio of cash involvement is dependent on the type of property transaction. In Primary market majority of the residential purchases are financed through mortgages. Though the sales will decrease for a certain period but eventually with Banks getting richer and having high liquidity, the Interest rates will decrease in the days to come. The service class population who have been sitting on fence to buy the property will finally purchase their long dreamt homes with easy mortgage plans offered by banks. With the lack funds for a developer to park it in a land for new projects, they are also finding it difficult to monetise their land bank to cut down debt obligations. These developers in the short term will fall prey to the cash crunch. To get some money in their accounts, they will have to offer price cuts to sell out the unsold inventory. This will be the Bonanza time for the buyers to purchase their dream home at never before offered prices.
Secondary market transactions essentially involve higher cash payouts. As discussed this is generally due to the variation in the circle rate and market rate of the property. Now that the government has come down heavily on black money, the cash component in property transactions will go down. This will result in a drop-in land prices and land deals will likely see a considerable dip for few months.
As RERA becomes effective and home buyers are secured under RERA of their investment, sales will additional pick up, especially in the affordable segment, much to the benefit of the government's Housing for All mission. The government has taken some brilliant moves all in sync with the Master stroke of Demonetizing the higher currency from the market. And, since corruption and approvals' bottlenecks are major factors responsible for price inflation, demonetisation, coupled with the government's next big reform to introduce a single-window clearance system, will make property affordable for the masses.
All in all it is a positive step taken towards increasing transparency in the Indian real estate industry.