Real Estate Expert's

Effect of Demonetisation on Real Estate

Demonetisation Is Not Going To Create Any Impact on the Housing Prices Particularly on Affordable Housing and Mid-Market Segment

With the present demonetization move by the Government, the much talked about industry today is real estate industry and the much talked topic is real estate prices.

The advent of series of transformational reforms Viz. Demonetization, Real Estate Regulator Bill (RERA), GST, Benami Transactions (Prohibition) Amendment Act, IFRS, all in a row and in quick succession has created lot of ripples, expectations and predictions about India’s real estate sector as to how it is going to react and respond in bringing home buyers confidence back into the markets.

The housing segment of the Indian real estate can be broadly classified into three luxury or upper segment, mid segment and low end /affordable housing segments. To put it bluntly, Demonetization is not going to have much direct impact on mid market housing and affordable housing segments. It may be relevant here to remember that the housing shortage in India is characterized by the fact that more than 90 percent of housing shortage (appxly 20 million units) relates to EWS/LIG Housing. The luxury real estate is less than 5% of the overall demand in almost all the cities.

With demonetization, it is widely anticipated that land price will come down. Approximate estimations say, post demonetization, southern states may witness 20% fall in land prices while Mumbai and NCR may witness a fall of 30% and 50% respectively corroborated with the cash components involved in the transactions hitherto.

The land price component in the affordable segment is normally less than 10% and hence the total impact may be about 2% if the fall in land prices are around 30%. This is very marginal and hence there will not be any impact.

There could be some impact on the land prices which may affect the luxury real estate market directly as the land cost is directly proportional to the end price of the unit / apartment / home.

Higher/Luxury segment may be benefitted by 25% – 30%, Mid Segment may be benefitted by 7% – 10% and Affordable Housing may be benefitted by 6% – 8%. For the EWS/Low Income segment, the saving or the benefit that may accrue because of anticipated fall in land prices by 30% (post demonetisation) will be still lower because of the fact that land component of the overall project cost will be much lesser (say less than 10%).

 States can be asked to frame by -laws in a transparent manner for every division / region of a city and bring out checklist for approval compliance and the approval process shall be made on-line thus eliminating intermediaries, avoidable unethical payments and expenditure. Stricter penal provisions shall be clamped within a time limit of 10 years for any wrong reporting /compliance. In other words project approvals shall be made online on Real time basis without loss of time cutting avoidable overrun finance costs, unethical payments – which  benefit can well be passed on to the home buyer in terms of the price he pays.

Digital approval clearance on line at the State Government level is quite possible when there is call from the Government to the common man to move to digital atmosphere for his day to day requirements. It will be appreciated that providing infrastructure like road water and sewerage is the obligation of the state and may have to be met of the Cess and tax collected from the project. Fund constrained Governments can examine some mechanism with private developers for initial outlay of funds in this arena.With renewed rejuvenation of the Government’s present move, both affordable housing supply and demand will go up.

If we are to realize the noble dream and mission of Housing for ALL by 2022, the Governments both at centre and state may have to accord serious thought to the above issues, with primary focus and importance on providing infrastructure like connectivity, water and sewerage for affordable housing projects, which, as said is the prime responsibility of the State.

Last but not the least, by and large, the organized segment of Indian Real estate sector wants to be as much transparent and fair. But this possible and in all fairness, only if systems and procedures at Government level is also made transparent eliminating the scope to be unethical at both the sides.

Overall the present measure by the Government is a welcome morale booster for the entire nation & economy and in particular to real estate sector which will surely witness a healthy growth with growing demand with organized, reputed, credible players on the ground in the days ahead.

By – M Murali, Managing Director, Shriram Properties

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