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Demonetisation: Time to cash out real estate

Given the diversified nature and geographical spread of the real estate and various players involved, the impact of 500 and 100 rupees notes withdrawal may not be uniform in all segments.

Paresh Karia
Easy2OwnEstate

The unexpected announcement by the government, withdrawing the 500 and 1000 rupees notes from circulation, has come as a rude shock for the real estate sector which was already going through a rough patch.

It’s a well-known fact that cash was widely used in real estate transactions. This sudden move will lead to drying up of liquidity and have a far reaching impact. There are many newspaper reports and experts who are claiming that the real estate price could go down as much as 30%. However, given the diversified nature and geographical spread of the real estate and various players involved, such generalization may not be appropriate. Let us dissect the impact of this announcement on the key segments/markets as well as various players in the real estate sector.

Primary Market

Primary market refers to the purchase of new property from the developer. This market is becoming more organised with the increasing share of branded/listed developers like Godrej, L&T, Oberoi, DLF, Shobha, Prestige etc., especially in tier 1 cities. Most of these developers have been accepting payments in cheque only and hence are not likely to be directly impacted. However, indirectly they may be impacted in the short run due to the negative sentiments which may lead to slowdown in sales. On the other hand, they now have a level playing field and a wider market since the buyers will not have option of going to other developers (mainly in unorganised sector) to deploy their cash.

Secondary market

Secondary market refers to resale of property by an existing owner. Here dealing in cash is established practice. The sellers would general take some proportion of the sales consideration in cash to avoid capital gains tax and the buyer would also benefit due to lower stamp duty. The proportion of cash would be more in high value transactions and also in case of properties where the difference between the circle/ready reckoner rate and the market rate is high.

With these announcements, in the short term, the transaction in the secondary market will virtually come to a standstill as the sellers and buyers try to figure out how to close the deals. Eventually, sellers in need of funds may reluctantly come to term with the situation and accept payment (or large part of it) by cheque, while those having holding capacity may continue to wait till circumstances are more favourable. It is possible that sellers may also demand a higher price to compensate them for the increased capital gains tax liability.

Investors

Investors fall in two categories - those investing mainly with objective of deploying unaccounted cash and others investing with the objective of diversifying their portfolio and/or earning regular rental income.

The easiest and most preferred way of investing unaccounted money was deploying it in real estate. Many developers were more than willing to take cash by way of investment as well as loans from the investors. Now, this avenue is no longer available to the investors, at least in the short term. Hence they will be forced to regularise their investments which in turn will make more options like equity, mutual funds available to them.

Investors paying through cheque and home loans (to take tax benefit) may continue to do so. In fact the turmoil caused in the short term may present such investors attractive investment opportunities in the next three to six months.

End users

Of late, property purchase has been dominated mostly by end users, especially in the affordable and mid segment, where we have seen people buying property by availing home loan. Given the recent changes, this trend will gather further momentum. In fact, the current uncertainty may present some very good opportunities to the end users to buy their dream home.

However, transactions in the high ticket segment (five crores and above) are likely to come down in the short term as the number of buyers who have such money in bank or capacity to take home loan is limited, except maybe in cities like Mumbai and Bangalore.

Developers

The cleansing of the real estate sector will attract more foreign investors like FIIs, Private Equity, REITS, FDI etc. Domestic banks, financial institutors and NBFCs will also be more willing to extend finance to the sector.

Organised developers are likely to benefit the most. Not only will they have a level playing field, but also access to cheaper funds from sources mentioned above.

The unorganised ones, especially in NCR and Tier II cities of North, who were dependent on cash, will find it very difficult to overcome this phase. One may see a significant price correction which may lead to further delays in completion of under construction project. Some of them may fold up and even abandon unfinished projects. Others may prefer to sell out or merge with a stronger player. In fact, we will see increasing number of developers, who are primarily landowners, entering into joint ventures with organised players having proven sales and execution capacity. This will be a win-win as the organised developer will be able to get land without any cash outflow and the landowner will be able to realise higher value from the developed project.

Thus, as can be seen from above, the measures taken by the government to curb black money will have varying impact on the real estate sector. While in the short term it will cause some pain, in the long term it will lead to consolidation and better organization resulting in good quality products being made available to home buyers at affordable price and better customer service. Also for the developers, it will open up avenues for funding at lower cost resulting in better margins. Real Estate development will become more like manufacturing products where the focus would be on higher volumes, lower margins and faster delivery, unlike in the past where it was more like playing on investing in land and waiting for the value to go up.

Advice to the home buyers

The current uncertainty may result in some softening in the prices in the short term. Home buyers should continue scouting for properties and wait for the right opportunity to unfold. Smart investors are already out in the market looking at grabbing such opportunities.

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First Published on Nov 21, 2016 05:09 pm
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