Stricter measures against black money have for long required bringing about greater transparency to give the Indian real estate sector more credibility and make it attractive to foreign investors.
The property sector is likely to be hit by the latest announcement by Prime Minister Narendra Modi on the demonetisation of 500 and 1,000 rupee notes as real estate has been a conduit for black money in India.
When it comes to the real estate sector, it accounts for around 11 per cent of GDP, according to the Ministry of Finance's 2012 White Paper on black money.
Talking about the immediate impact on India's real estate sector, Anshuman Magazine, chairman, India and South East Asia for CBRE, said the sector might face liquidity stress which would delay construction in short term.
"As a result of the Government's decision, land prices are likely to be most impacted, as the cash component is most prominent for land transactions. Land transactions and/or sale of plots are expected to dip in the short-term, especially in the unorganized real estate segment," he said.
In the short-term, transactions in the secondary market are also likely to be impacted negatively - especially in Tier II/smaller cities. On the flipside, this move is likely to exert downward pressure on capital values, which is expected to result in increased affordability, particularly for the housing sector, in the long-run.
The overall move has been hailed by the real estate industry.
Commenting on the development, Ashish Sarin, CEO, Alpha Corp, said, "There is a widespread corruption in the system and the government had to take stern measures to weed out corruption from the grassroots level. The Prime Minister's move along with bringing transparency in the sector would also be instrumental in easing up the approval process. The move however would impact the unorganised real estate players."
The announcement is likely to enhance the sentiments of global investors looking at larger investment in India, said Vineet Relia, managing director of SARE Homes.
"In the short term there will be cash flow issues and primary sales originating through migration of customers selling older family homes for new properties will get affected", he said.
A spokesperson of Emaar Group said, "This would also present a good opportunity for home buyers to buy their dream homes, thereby boosting the overall market sentiments. We believe that in long-term, this is a positive development for the industry".
The property players are showing confidence in the sector as it would 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 the RERA Act and the demonetization 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, CMD, Sheth Corp Ltd.
Long-term impact on the realty market, according to CBRE's Magazine, is likely to prove structurally positive.
It helps that the real estate industry has already moved towards transparency in its operations. Several steps taken by the Government in recent times, from the Real Estate Regulatory Act (RERA) and the Goods and Services Tax (GST), to REITs, combined with this announcement, will further improve transparency and increase investor confidence in the real estate market in the long run, he added.
This will be a landmark decision in imposing the much needed transparency in real estate transactions, particularly in the housing sector, Magazine said.
Over the next 12 months, 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 Abhishekh Lodha, MD, Lodha Group.
BW Reporters
Naina Sood is a Economics graduate and has done her post graduation in International economics and Trade. She has deep interests in Indian economy and reforms
