The Modi government's surgical strike against black money by way of demonetisation of high value currency notes, is set to shake up the real estate sector, marked by transactions involving unaccounted money. The landmark move, may initially hit the sentiment of the sector facing slowdown, but in the medium to long term, the trailblazing initiative to stamp out black money and bring in transparency, will prove to be a boon for real estate.
Real estate is an asset class which has been significantly absorbing black money. Because of the big gap between the official rate and the market rate, there is a substantial cash component in the property transactions. Though the cash dealings in primary market, especially residential sector are far and few, due to home financing through banks, the secondary market has a significant cash component of 30 percent or more. The cash transactions are also there in high value luxury homes deals. In land, the cash component can be as high as 40-60 percent. The real estate developers encourage cash pay-out by offering discount on property price. Investors with hordes of black money, have been resorting to speculative buying, which in turn, has been leading to artificial price hike and profit booking. Over the years, this practice, had made homes unaffordable and out of the reach of masses.
However, the government's onslaught against black money through demonetization, will push speculators with unaccounted money out of the system that will in turn result in correction in property prices. As a precursor to this, there is a big drop in property transactions. Over the last two years, the government has been undertaking a series of reforms in the real estate and housing sector, with a view to make this sector more credible, transparent and investor- friendly on one hand and on the other hand to make housing affordable for the masses. It is keeping in view this broad objective that the government launched its flagship programme, 'Housing for All by 2022" Under this programme, the government has an ambitious target to build 6 crore homes. And in order to achieve its objective, the government is promoting affordable and low-cost housing, as maximum shortage is in this segment. The government made a budgetary allocation of Rs 4000 crore to National Housing Bank to promote affordable housing and brought housing for economically weaker sections and slum redevelopment under CSR. The exemption for built up area and capitalisation requirements was made for better access to FDI. For low cost homes up to 10 lakh, a subsidised interest rate of 6 percent was introduced.
Lack of easy and cheap funding has been the bane of real estate sector. In order to boost funding to the sector, the government took to FDI easing, Real Estate Investment Trusts (REITs) and other initiatives like allowing foreign investments in Alternate Investment Funds (AIF) and doing away with distinction between various kinds of funding. Besides these reforms, the government ushered in the landmark, 'Real Estate Regulation Act' (RERA) which has been stalled for long time. This is a historic legislation to make property transactions more transparent and secure, in order to safeguard the interests of property buyers, especially home buyers who were getting short-changed at the hands of unscrupulous developers. RERA, will put an end to malpractices, bringing sanity in real estate, much to the benefit of end- consumers. Further the historic GST Bill, making tax system more transparent and predictable, together with the proposed single window clearance system, will promote ease of doing business.
The government's demonetisation move, together with Benami Property Act, has to be seen in this backdrop, as government's multi- pronged policy to create institutional and regulatory architecture for speedy growth of economy .All this will improve investor confidence and sentiment and make real estate as an attractive asset class for investment by foreign investors. The impact is already visible with global pension funds committing billions of dollars in real estate and infrastructure.
Another visible impact of demonetisation, is further reduction in interest rates which have already seen a cut of 150 bps in the last about 18 months. The demonetisation has boosted the liquidity in banking system and with lowering inflation, bankers and financial analysts, are expecting 25- 50 bps cut in repo rate by RBI in December policy review, bringing the effective interest rates below 9 percent.
In the New Year, we may well be heading towards Vajpayee government era, when interest rates were in the range of 7-8 percent. This dual impact of demonetisation, bringing down property prices and lowering interest rates , will make homes affordable, realizing the dream of 'Housing for All'.. And once the initial instability owing to demonetisation gets over, the real estate sector will emerge much stronger, with greater stability and affordability towards sustainable growth.
Vinod Behl is a Delhi based senior journalist. Regularly writes for major dailies on real estate and infrastructural issues.
Views expressed in the Article are author’s own.