Nov 24, 2016

The recent measures taken by the Government of India to curb black money are not only bold but are also one of the turning points in the history and economy of a country. As a portion of India’s black money transactions is assumed to be in real estate, this move is likely to impact the sector. With the demonetization of existing currency denomination of INR 500 and INR 1000, the move clearly is expected to weed out the black money component in circulation till date. It is also expected to provide for better control on such practices with introduction of movement of high value notes enabled with Nano technology features.  The fundamental shift to 100% accountable cash transactions and tax compliant structure is expected to lead to realignment of business practices in the Real estate sector towards a more transparent and institutional regime.

The residential sales in the primary markets is likely to be least affected as the inventory is largely backed by housing loans. Resale market on the other side is likely to get impacted, especially from the perspective of those investors who dabble in cash transactions, such transactions in this segment will be curbed. Land transactions typically involves higher proportion of cash and is expected to be impacted the most; potentially leading to extended time for closure of ongoing deals. This is expected to impact fresh supply in the short to medium term.

The current demonetization is expected to lead to increase in demand for organized players, who had been putting their act together over last 4-5 years. While there might be a temporary slowdown in transaction activity, residential projects of organized developers are likely to see an increase in demand because of a shift in demand from unorganized projects.

Overall, the much-required cleansing of the sector will also set the momentum for growth based on sound fundamentals. In Addition, the funding requirement for the sector will increase both for purchase of new land and construction funding. Combining the effects of ‘Curb on black money’, ‘RERA’, lowering of interest rates and Pradhan Mantri Awas Yojana, we expect there will be a complete reset of Real Estate and a beginning of a new era of cashless real estate economy, which will help in furthering of positive sentiments for the residential real estate in the medium to long term.

In the long run, the introduction of new currency notes and improved clarity and transparency will give a sharp boost to all formal channels of payment which in turn will help the economy to grow. This move is also expected to improve India’s position in ease of doing business index due to increase in transparency and reduction corruption, enabling higher capital flow in to the country in the form of FDI and FII.

Tips for Home Buyers

1. New supply will be impacted in the short term, leading to reduction in overall inventory levels, though at tepid pace
2. Sales of projects by credible and reputed developers in specific localities with low inventory overhang and thriving physical, commercial and social infrastructure are unlikely to be affected
3. Increase in liquidity to lead reduction in interest rates which will augur well on demand side. Any purchase at flexible rates to get benefit
4. Right time for buyers to sit across the table and try to sweeten the deal by negotiating for additional benefits. These would typically be 5 to 10% saving already. Preferred choices/options may not be available for ‘Wait and Watchers’, as buyers strike deals at attractive prices in selected projects and growth corridors
5. Price impact to be largely seen in the resale market, luxury projects and land towards peripheral localities of the city. Should not expect across the board fall and will be deal specific. Such projects already indicating stress should be avoided, until there is high confidence on delivery capability of the developer
6. Cost side pressure to leave minimum flexibility with the developer to reduce prices. Though construction cost has increased by 25-30% in the last 3 years, prices have hardly beaten inflation levels. Below these levels, it will not be profitable for the developer to execute projects
7. It would be critical and important for buyers to fix their budgets and look at properties in the range (it would be very difficult to time the price). The delay would be leading to increase in rental outflows (they anyway will increase by 10% affecting the cashflows). There will be high risk of booking in under construction projects (risk of delivery, financial stress including rental values & EMI).
8. Go by projects where developers have track record of delivery timelines, transparency and financial ability to execute the projects. These projects will contain minimum risk and if they are available at flexible payment terms and offers, these should be considered favorably by the buyers

With RERA implementation, the cash flow of projects will only be realized after all the approvals are in place. This would result in an increase in the holding period cost compared to the previous practice. This increase in holding period cost is expected to be passed on to the customers if purchased at later stages.