The recent announcement by Prime Minister, Narendra Modi that all Rs. 500 and 1000 rupee notes cease to be accepted as a form of legal tender has been perceived by most as unprecedented but is indeed a welcome step towards cleansing the Indian economy. In an effort to curb corruption and fight the menace of black money, this is also expected to stop the counterfeiting of the current bank notes and potential funding of terrorism. A truly bold decision by the ruling government that is akin to a ‘surgical strike’ on the parallel economy.
Like several industries and sectors, the impact of this move on the real estate industry is quite significant. It is being largely hailed as a move that will lead to transparency and make the sector more organized. This act by the government will definitely make the industry more robust and reliable creating an atmosphere that is conducive to foreign investors. FDI, private equity, debt players and banks are likely to see find the market more attractive and systematic which definitely augurs well for the sector in the long term.
This is indeed a really good move by the government and experts do not see any long term negative impact on the real estate industry. The sector is already well regulated and all the transactions are transparent. With this decision, it is expected that the market will get more money in circulation, which will enhance interest rate stabilization.
The unorganized and secondary market, is however, most impacted by this decision. It is here that a major part of the transactions are conducted in cash resulting in the preponderance of ‘black’ or unaccounted money in real estate. Only individuals with large amounts of unaccounted cash will be hit adversely by this move of the government. Large amounts of cash stashed up have always led to fictitious land rates. The secondary or resale market as well as retailers could see an impact on their business given the fact that the cash component have no role in them.
Traditionally, it is in the secondary and unorganized sector that land transactions are carried out at disproportionate rates using unaccountable cash. This move is expected to bring a correction in the land prices in the short term thereby resulting in an increase in the affordable housing segment.
Generally real estate, in the past, has experienced the phenomena of excess and unsold inventory but with no significant price reduction. This is sure to boost demand in the medium term. When money circulation increases, banks will have disposable amount for loans and easing of interest. This will certainly reduce inflationary pressure leading to consumer getting benefit of lower cost. With reduction of cost, the spend will be comfortable leading to disposable income. Since real estate is one of the safest investment, this sector will see increased off take in due course.
Apart from all of this, the organized developers will continue to gain market share and dominate the space in the medium and long run. Eventual implementation of the Real Estate Regulation Act (RERA) and higher transparency in the approval process will only help this further. Also other smaller builders who deal in 100% white transactions would get a fair level playing ground. Therefore, this controlled and regulated growth of the sector will see consumers benefit as there will be a significant drop in the levels of corruption.
In the long term it is even expected that prices see an upside as sellers gradually come to terms with the fact of capital gains being a reality. They are likely to factor this liability into the consideration and the same holds good for the rest of the production chain. Developers, contractors and sub-contractors would have their input costs going up and all would work on the same principle of raising prices to maintain similar margins. All in all, a positive neutralization effect that is expected to bring in the much needed stability to the sector.
Mr. Suresh Hari,