Impact on real estate

impact on real estate

Government’s announcement to withdraw ₹500 and ₹1000 notes from the market, aimed at curbing black money transactions will affect the Real Estate and Gold markets the most.

Curbing the parallel economy has long been a sour spot for the government and the RBI. In real estate market especially, where the transaction values could range in crores, the cash component is a whopping 20-30%, increasing further in Tier II and III cities. The most audacious and revolutionary move the country has witnessed involving demonetization of ₹500 and ₹1000 notes and introduction of new ones of the new/ same denomination will hit the root of the black money the hardest i.e. real estate transactions.

In a project life cycle, the initial phase i.e. land purchase attracts the largest amount of unaccounted money. Most of the metropolitan cities face an oversupply situation which has reduced the number of new launches in the market. For the few new launches that are taking place, lack of the most needed seed capital at the beginning of the projects which is provided by the investors mostly in cash will reduce. Thus, creating a major impact on cash strapped developers. Though the big developers have been preferring to deal through cheques, they would also be affected by the market corrections.

This move will also have a ripple effect on other sectors as during the construction phase, material purchase, labor etc. are paid in cash, creating a further cash crunch. This will affect the margins of real estate developers, phasing out the non performing ones.

The move is expected to further create a downward pressure on the prices, making the houses affordable. Thus the biggest gainer of this will be the home buyers for whom owning a house was largely a dream due to unaffordability. Curbing the cash component will help customers distinguish between genuine and unreliable players, strengthening the industry in the long run. This would also help the genuine developers get finance from organized sources like banks, reducing their interest costs and improving their financial viability. Thus making the industry more transparent in the long run.

We expect this move will aid the Real Estate Regulatory Authority (RERA) regularize this industry and help all the parties involved. The move will rationalize the industry, correcting the prices in the short term thus helping the buyers. In the long run it will wade out the unscrupulous developers and middle men, strengthening the industry.