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Real estate sector to hurt from ban on Rs 500,1000 notes

The government's decision to withdraw existing currency notes of Rs 500 and Rs 1,000 from circulation has rattled most property developers given the huge cash dealings in the sector.

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The government's decision to withdraw existing currency notes of Rs 500 and Rs 1,000 from circulation has rattled most property developers given the huge cash dealings in the sector.

Shares of leading property developers were hammered today as the market is worried of a blow to earnings in the short term.


Among the big losers, shares of Indiabulls Real Estate Godrej Properties, HDIL, Unitech, Sobha Developers, Oberoi Realty and Prestige Estates were down 11-20 percent.

The primary market, where one buys a house in a project directly from a developer, will not be directly impacted by the measure as most property developers now accept full payment in cheque. But secondary sales may be affected since nearly 30-40 percent of the property value changes hands in cash.

That in turn could indirectly hurt primary market sales since a lot of real estate is bought by investors who are looking to sell out for a quick profit.

Residential property market in key metros has been lackluster for a while now as high prices and sluggishness in the economy and job market have kept buyers away. 

"Effectively the primary market will not be very disturbed as the inventory was sold to end users who avail home loans,” said Getamber Anand, President - CREDAI National.

“Moreover the organised part of the RE (real estate) industry has always been compliant and it is only the unorganised fly by night players who will be affected. This move will help 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,” he said.

The real estate sector in India contributes about 11 percent of the gross domestic product or GDP. Investment in property is a common means of parking unaccounted money and a large number of transactions in real estate are either not reported or are under-reported. This is mainly done to evade or minimize tax liabilities.

Concurring with Anand’s view, Gulam Zia, Executive Director, Advisory, Retail and Hospitality, Knight Frank India says, “All kind of developers will be affected with this move as one third of the overall real estate economy runs on cash; so if one third goes out there will be huge liquidity crisis.”

“Administration, political pay offs where one had to spend to get permissions will stop, and so the vicious cycle of black money continues in real estate. The move to curb black money will impact the real estate sector severely which is already struggling,” he said to

Rohit Gera, Managing Director of Gera Development and Vice President of CREDAI-Pune Metro feels the move will encourage the growth of organized and professional developers who favor cheque payments.

Most real estate experts opined that the ban could help cool property prices as the flow of unaccounted money into the sector could fall sharply in the short term.

Also, banks and financial institutions would become more amenable to funding realtors because of increased transparency.

In the immediate future, the sector will be under serious pressure with volume and number of transactions in residential and land markets seeing a substantial downward trend.

Ambit Capital believes that Modi’s attack on black money will lead to a crack in land and real estate prices. In the short run, this spells bad news for lenders as well, which have loaned money to the sector. 

“We don’t see an immediate fall in land prices, but transactions will certainly freeze,” Dhruv Agarwala, Chief Executive Officer, and 

“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 and would eventually reduce prices,” he says.

But beyond the initial pain, there are benefits too, he says.

“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,” he says.

First Published on Nov 9, 2016 02:23 pm