Monday, 28 November 2016

Demonetisation and its Impact on Real Estate: Gaurav Gupta, Director, SG Estates Ltd.

Demonetisation by our Prime Minister Narendra Modi is one of the boldest decisions taken by Independent India in Last 69 years. This decision will play a crucial role in India’s growth and development in the years to come.

Among the various positives and negatives of Demonetisation, various news articles and reports by experts have emerged that Real Estate will see a massive price correction and people must wait to buy before the price correction occurs.

It is wrong to consider the entire Indian Real Estate as one. Indian Real Estate has various classifications like affordable or luxury; authorized or unauthorized; primary market or secondary market; tier 1 or tier 2 or tier 3 cities; agriculture land or urban land; end user market or investor market etc.
It is important to consider certain facts before accepting or rejecting something on the face of it.

In primary market (where buyer buys directly from the builder or colonizer or authority), mostly the purchasers are end users who are buying property to make it their home or as an asset class to hold it for long term. This holds true in todays scenario because investors are absent from market since almost 3 years due to market being stable.

End user market is growing on back of Home Loans availability. Buyers pay 10-20% margin money and take the balance Home Loan to fund their purchase.
Due to Demonetisation banks are expected to get deposits of approx. 10 Lacs Crore as per the estimate of the Government and with this kind of liquidity and cost of funds going down for the banks, the rate of interest of Housing Loan will most probably go down. This will not only result in lower EMI but also increased Loan Eligibility for an actual Home Purchaser.
From the past experience when the Home Loan rate of Interest was in range of 7.5-8%, the Indian Real Estate had seen the maximum growth and boom.
Banks have already reduced their deposit rates.
Hence we can infer that with demonetisation and banks reducing their rate of Interest, primary real estate market will in most probability  grow and demand will increase in end user driven markets.

This hold more true for affordable home segment market for areas like Raj Nagar Extn. Ghaziabad, Noida Extn., Bhiwadi, Faridabad where home purchasers are mostly the first time purchasers and property cost is below 50 lacs.

Already the government rules did not permit to take cash more than Rs.20,000=00 in the property transaction. Hence the cash component was almost negligible in the primary affordable home segments.

Demonetisation will definitely impact unauthorized construction, secondary market sales where some component of cash might be present and with less cash liquidity in hand, they will also move towards complete cashless mechanism.

Real Estate industry contributes more than 7% to India’s GDP and supports more than 360 ancillary industries and is the second largest employer after agriculture in India.

In the longer run, we will have more tax payers and increased tax revenue for the government which might result in lower taxation as a whole.

All the developed economies in the world are cashless economies and day is not far when India will be counted amongst the Developed Countries.


Gaurav Gupta

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