Modi Demonetization Is Impact On Real Estate Or Not?

Real Estate is arguably the most affected due to demonetization. There is an unspoken rule in the Indian real estate market that every real estate exchange (assume Rs 1000) will include a nominal government rate (assume Rs 400) and an illegal black market rate (assume Rs 600). The elimination of the black money will cause a dip in the real estate value immediately.

Firstly, the real estate builders/plot owners will not accept heavy cash components in the transaction. The ready estimated values of most of these properties are very less than the market value of the properties. So the buyer has to pay the market value in white. Usually the black money accounts for more than 30% of the transaction value in most of the real estate markets. So if the entire transaction amount is exchanged in white money, the transaction charges will increase making the property more costly. Hence less buyers would be looking forward to buy the property unless the market value comes down.

demonetization impact on real estate business
demonetization impact on real estate business

Secondly, Real Estate investment is considered as a way to convert black money to white. Since the builders will not accept heavy cash component and since the government has already declared that it would strike on benami/illegal properties post this demonetization, Investors would be less keen in real estate investments. Hence, when the demand is less it will lead to decreases in the market price of real estate properties.

We can summarize the entire act in the below given pointers.

1)The current demonetization will make it difficult for tall the buyer to pay in cash. The seller will also not be able to accept those money. This will automatically bring down property prices.

2)At the beginning stage of any real estate project, land purchase has the highest contribution (40 per cent or more) of unaccounted money. There is a cash contribution of 20-30 per cent in property transactions, mainly because of the difference between the market rate and collectorate rate of property. Demonetization will effect this terribly.

3)Will lead to correction of real-estate prices in market where investment was done through black money.

4)Real-estate sector in India contributes almost 11 per cent of the total GDP, and accounts for more than 50 per cent of the current black money market. Freeing this money will boost GDP.

5)Urban Land Ceiling Act, coupled with foreign investments and tax holidays had made people buy properties in bulk and then sell it in higher prices which lead to property inflation. This won’t be the case any longer.

6)No registration records were maintained even for larger properties. This will change now that the investments would be legal.

Real Estate will eventually be the biggest sectoral loser on black money crack down.The builders/developers will face huge shortage of capital as they were relying heavily on cash reserves to complete their ongoing projects.With the onset of RERA and ban on transactions on 500 and 1000 currency notes, the transactions in areas with lower circle rates will also reduce notably leading to a slump at both ends of the real market spectrum.

With the lack of cash reserves to finish the construction of their real estate projects, the builders will face a steep rise in cumulative project development costs leading to a further delay in completion of projects .

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