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Narendra Modi’s Demonetization Move Will Impact Real Estate

Often termed as laidback sector with a reactive approach, the real estate industry, surprisingly, was quick to react to Tuesday’s announcement of demonetising of Rs 500 and Rs 1000 currency notes. It appears that the sudden announcement by Shri Narendra Modi has spread some tremors in the real estate market, though the actual magnitude of this jolt is yet to be measured.
kerala-unable-to-deal-with-centres-demonetization-move-indialivetodaySouma Mukherjee

Real estate has always been synonymous with black money. Property transactions never used to happen on the defined circle rates. On an average, a ratio of 35:65 was into practice where only 65% of the cost transacted in white. Well, all these become history! Thanks to India’s one of the dynamic prime ministers Shri Narendra Modi who, in a yet another dynamic and surprising decisions, announced the withdrawal of Rs 500 and Rs 1000 dimension currency notes. This decision is aimed to curb the parallel economy of black money and fake currency. Shri Modi also said that these two currencies would be substituted by new series of Rs 500 and an all new series of Rs 2000 notes.

Here’s how the real estate vetrans reacted:

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 unorganized 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 Before too long, the caricatured version of black money driving Indian real estate is no longer applicable.

Jason Kothari, CEO, Housing.com

“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.”

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.”

Vikas Oberoi,CMD,Oberoi Realty

“This is a brilliant step taken by Hon. Prime Minister Mr Modi that will help grow the size of the Indian economy. This step (another campaign of clean India) will lead to an image makeover for India and is bound to increase foreign investments. Real estate companies that are not a part of this parallel economy will now have a level playing field and will now thrive.”

Tushad Dubash, Director, Duville Estates

We welcome the government’s initiative which has the potential to curb unfair trade practices within the industry. Initiatives such as this will go a long way in increasing transparency and restoring home-buyer confidence in the market. It will also pave the way for those developers with strong corporate governance to be able to meet customer’s expectations in a fairer, albeit competitive, market. In a nutshell, a good move by the government that promises a healthy and conducive environment for growth and development of the real estate sector.

Navin Makhija, MD, The Wadhwa Group

The recent announcement by PM Modi is a welcome step towards cleansing the Indian real estate industry. The demonetization of Rs 500 and Rs 1000 currency notes will lead to transparency and systematize the sector. This move will make the industry more reliable and engaging for foreign investors. The unorganized and secondary market will be the most impacted by this decision.  With this banks will be flushed with fund and this will reduce interest rate and improve the GDP as well, given this sale will pick up we as developers just need to ensure that continue to provide quality homes to the buyers in time.

Bharat Dhawan, Partner, Mazars

This move will also have a ripple effect on other sectors as during the construction phase, material purchase, labor etc. are paid in cash, creating a further cash crunch. This will affect the margins of real estate developers, phasing out the non performing ones. 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 un-affordability. 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.

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.

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 cash less economy. The move will have a major impact in secondary sales especially in the high value segment. At SARE we comply to the highest standards of corporate governance and 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 confidence of global investors looking at large investments in the real estate sector.”

What Should Developers Do?

Santosh Sinha, Editor, RealtyMyths

Developers are surely going to face a fund flow crunch in the short term. With RERA already into being and ready to clutch in the defaulters who fail to deliver projects on time, developers are going to face a tough time ahead. The sales have not been up to the mark. This step is further going to dent their sales in the short run. However, in the long run, today decision will bring in more transparency in the sector. It will also open a wide window for affordable housing category and encourage developers to build homes within Rs 50 lac limit. With GST rates rolled out and promising ease of doing business by simplifying tax norms, developers are certainly going to get benefitted with the 28% slab. The new rates under GST are certainly below the current tax paid by the developers at various levels.

Developers who are ongoing with their project thus, may reach out to their existing customers, ask for short term loan at market price and commit to them to deliver their project and the interest amount as agreed under sale deed. This will save them from two problems. They will not have to borrow from institutions at a premium; on the other hand, this will boost customers’ confidence and will solve the issue of protests, agitation, and delayed construction.

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