High-end notes scrapped: Blow to real estate, but experts say stability coming

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The real estate sector that has been accused of hitching its fortunes to illicit funds suffered a body blow after the government scrapped high-value banknotes in a blitz against black money and corruption.

Realty stocks ended 17.5% lower on Wednesday while property prices, according to conservative estimates, slumped about 25% in Delhi and Gurgaon after 500- and 1,000-rupee notes were pulled out of circulation. Some estimates put the price crash at 40%.

In south Delhi’s Chhattarpur, resale price of farmhouses fell from Rs 20 crore an acre on Tuesday to Rs 15 crore overnight. Likewise in Gurgaon, negotiations for a resale property in DLF Phase 1 fell from Rs 1.45 crore to Rs 90 lakh.

Experts said the fall in prices is short-term and will stabilise soon, bringing transparency to the sector and ending dubious cash transactions.

“In the long run, the move is likely to prove structurally positive for the real estate sector,” said Anshuman Magazine of real estate services firm CBRE.

Union urban development and housing minister Venkaiah Naidu held out hope to homebuyers.

“The decision will give huge relief to homebuyers. The inflated price of land will come down and make housing affordable for a large section of society.”

His colleague, transport minister Nitin Gadkari, said as much.

“The move will check the black money in real estate. Taxpayers need not panic. There will be teething trouble but things will even out eventually.”

The market for farmhouses, residential plots and builder floors in New Delhi and resale apartments in Gurgaon, Faridabad, Noida and Ghaziabad is under the secondary or unorganised segment.

Questionable transactions are said to be widespread in this segment, which the government is trying to clean up with a landmark law to regulate the real estate sector that contributes about 9% of India’s gross domestic product.

The law is designed to protect millions of homebuyers facing harassment because of limited legal options at times of dispute, as regulator will oversee all future transactions and settle disputes.

Homebuyers would gain again from the government’s latest move that would do away with speculative pricing.

Read | Real estate registrations to feel the pinch of Modi move

“There was a lot of speculative activity due to cash transactions. But now, prices will be real and it will be advantageous for the buyer,” said Shveta Jain of Cushman and Wakefield, a real estate services company.

Small-time operators in the realty business will bleed from the crackdown on black money.

“Because of huge cash involvement in the secondary market, property dealers and builders of small projects will take a severe hit,” said Sunny Katyal of real estate brokerage firm Investor’s Clinic.

The bleeding was acute on Wednesday. Property dealers said prices are being negotiated on circle rates — the minimum price set by the government at which a property can be sold.

“Properties were sold at Rs 1 lakh a square yard and 40% of the payment was made in cash. But Tuesday’s announcement, circle rates are dominating the price … Rs 65,000 a square yard,” a dealer in Gurgaon said.

The demonetisation exercise will not impact the affordable housing segment in Noida and Ghaziabad, the Confederation of Real Estate Developers Associations of India (CREDAI) said.

“Circle rates and market rates are almost equal now. So, our prices will remain stable,” said Pankaj Goel of CREDAI-NCR.

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