Realty sector prices may crash 30%

The Indian real estate sector is set for a major price correction thanks to the government's decision to declare higher denomination Indian Rupee (INR) as illegal currency. Experts are of the view that realty prices could correct around 30% over the next 12 months particularly in the unorganised sector. The impact could also be seen on the valuation of land transactions as the move by the Reserve Bank of India (RBI) is likely to result in the scourge of black money vanishing from the industry and the overall economy.

According to Rajesh Krishnan, managing director and chief executive officer of private equity and land-banking firm Brick Eagle Capital Group, the real estate sector will definitely be impacted. “We can expect up to 30% drop in land and property prices over the next 12 months. This move is also a great news for the affordable housing sector because cash component is typically minimal as buyers require home loans for up to 90% of the property price. As a result, demand in the affordable housing sector will stay intact.”

The ban on higher currency notes, experts said, is a major move that 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,” said Anuj Puri, chairman and country head, JLL India.

The decision will have a profound impact on business in the housing sector, affecting both builders and potential investors, say analysts. For instance, if a house is registered for Rs 40 lakh and its sale value is raised to Rs 60 lakh, the extra amount of Rs 20 lakh has to be paid in cash. However, it will now be difficult to sell the house at Rs 60 lakh as buyers will not have Rs 20 lakh to pay as kachha (cash). Thus, prices will crash as the cash component will vanish.

Prices coming down to more reasonable levels in the residential property market cannot be ruled out, said Shishir Baijal, chairman and managing director, Knight Frank India. “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. While it cannot be denied that the impact of this move will be felt in primary markets, secondary markets along with tier-II and tier-III cities will also take a hit,” said Baijal.

However, Getamber Anand, president, CREDAI National, is of the view that the primary market will not be very disturbed as the inventory is sold to end users who avail home loans. “Moreover the organised part of the 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 the 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,” said Anand.

Echoing the views, a DLF spokesperson said, “For big players and for all companies, the move may not make any big difference, as long as they carry out their transactions through banking channels. Only those, who do not, will be impacted.”

The impact of the scrapping of Rs 500 and Rs 1,000 currency notes, realtors said, will be huge in many markets where payment of cash is mandatory and the major form of profit taking. “These markets will see a major crash making an already difficult situation even more challenging. In addition to eliminating black money, this will definitely bring down corruption at least for a while. In the medium to long term the policy that emerges will determine how much corruption will return in due course,” said Rohit Gera, managing director, Gera Developments and VP, CREDAI - Pune Metro.

While investments made with unaccounted wealth is set to be eradicated the move is also set to bring in transparency in the sector. Further, realtors feel, the Government's move will help curb many inconsistencies and unfair trade practices bringing professionalism in the sector. 

“Reputed builders would not feel the pinch as they have been making use of bank channels for transactions. With this combination of Real Estate Regulations Act (RERA) and demonetisation of the 500 and 1000 currency notes, we can expect to witness positive reforms and sales growth in the affordable housing sector. This is a win-win situation for developers and home buyers,” said Ashwin Sheth, chairman and managing director, Sheth Corp Ltd.

The real estate sector, according to developers, is in a revival mode and the implementation of RERA has brought a lot of confidence amongst buyers. According to Abhishek Lodha, managing director, Lodha Group, the reduction of cash will place India in the same league as the more developed countries and make the economy more efficient in the long run. 

“The professional, well-organised companies in the real estate sector will significantly benefit from this move and the scourge of black money will eventually vanish from the sector and the overall economy. Over the next 12 months, a lot of money will flow into financial instruments and hard assets like real estate, since people will be encouraged to disclose their earnings willingly. This is likely to improve liquidity and lowering of interest rates, all of which will help boost the economic growth. As the prime minister said, there may be some short-term pains, but it will be hugely beneficial in the medium term,” said Lodha.

A bold and positive step, this is in pursuant to the policies initiated by the government towards bringing more transparency in property dealings, confidence building measures for home buyers and creating a positive environment for the industry at large. Manju Yagnik, vice chairperson, Nahar Group, said, “Home buyers will now be able to evaluate more realistic pricing of property. It will separate the wheat from the chaff; clear off any uncertainty and increase buyer confidence. It will provide well-renowned realty brands with 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.” 

Realtors also feel this move will give a sharp boost to all formal channels of payment which will help a formal economy to grow. Dhaval Ajmera, director, Ajmera Realty, said, “It’s definitely is an indirect advantage to honest taxpayers. The deflationary impact in general and more specifically on real estate prices will be a boon for affordable home prices.”