Expecting Property Price To Fall After Demonetisation Move? You May Be Disappointed

Hearts of millions of investors sank when analysts predicted India's real estate sector will be hit the hardest by the government's decision to demonetise Rs 500 and Rs 1000 currency notes.  The fall in real estate stock the day after the announcement only made things look scarier to investors. However, the knee-jerk reaction of the markets and the gloomy predictions of impending doom by experts may be ill-founded on many grounds. 

Let's start with primary sales.

According to CREDAI, the apex body of private real estate developers, a majority of the builder-buyer agreement were made either through fund transfer or via cheques. With the passage of the Real Estate (Regulation & Development) Act, 2016, developers have become extra cautious to keep their books clean, reluctant to park unaccounted wealth in their projects. This is a key reason why the use of unaccounted money in primary sales has been low in the recent past. 

Now, buying trends indicate that overall primary sales might slow down for two-three weeks only. Sales in this segment may, in fact, increase; the resale market's loss would be the primary sales market's gain. But, if you are expecting a price cut, you may be disappointed. 

Here's why.

PropTiger DataLabs figures show the demand for new units fell from 4.7 lakh in the financial year 2013-14 (FY14) to 2.1 lakh in FY16. On the other hand, property prices appreciated in the 0-7 per cent annually during this period across major cities. If the humongous drop in demand did not trigger price fall, it is highly unlikely the demonetisation move would do so.

There is another reason why developers, who have been hit hard by a slowdown in the past two years, will not budge as far as price reduction is concerned. So far, most developers pay their labour force and smaller suppliers in cash. Now, these payments will be made using banking channels, attracting a service tax levy. As a result, construction costs of projects will shoot up for developers, who would, in turn, have no choice but to pass it on to buyers. You do not expect developers, who are sitting on huge inventory stock and hard hit for cash, to cut prices at a time when they are already quite hard pressed.

"The idea of a drop in housing prices by about 20-30 per cent is far-fetched. Builders, at least in Bengaluru, are working on wafer thin PAT (profit after tax) margins of 8-10 per cent. There is no scope of further decline," Credai chairman Irfan Razack said in a media report.

"The consumer sentiment has of course turned negative but it may result in a drop in price by about 5 per cent, nothing more," he added

All that considered, developers are starved for liquidity, which leaves no scope for any price cut. Over the years, input costs have gone up significantly — this includes material costs as well as expenditure developers have to bear for an array of clearances. Projects delays could be a cause of concern for home buyers, but, they have been giving developers across the country sleepless nights. Real estate projects after being tossed among several bureaucratic hurdles end up costing developers far more than they might have factored in. In a scenario like this, developers, in fact, do not have the option to reduce prices even if they are much willing to.

"Whatever correction in prices could happen has happened, and developers cannot reduce prices further even if they wanted to. Doing so would, in many cases, seriously impact their ability to stay in the market. Adhering to the Real Estate Act rules would mean promoters will be bound by more procedures, and this may increase the cost of their projects," says Kishor Pate, chief managing director, Amit Enterprises Housing Ltd.

"It is a myth that has been prevalent in the market for very long now that real estate prices would go down further. On the contrary, the fact is that prices will very soon be seen going up based on the recent positive steps, which have been taken towards the sector and economy on a whole. Implementing the Real Estate Act is in itself a bold step when one comes to the topic of organising the much-unorganised sector," says Dhiraj Jain, Director, Mahagun Group.

"With the current slew of measures taken against usage of black money, things are going to be more in favour of developers. Now, there will be an open playground where everyone will be competing on equal terms. And, with prices barely above the break-even point, every developer will look to work better and earn more," adds Jain.

Getamber Anand, President of CREDAI-National, said: "Effectively the primary market will not be very disturbed as the inventory was sold to end users who avail of home loans. Moreover, the organised part of the real estate industry has always been compliant, and it is only the unorganised fly-by-night players who will be affected. This move will help the industry to fight more effectively for removal of Section 43CA of the IT Act as now there is no reason to charge tax on so-called deemed income to both buyer and seller post this move.”

“The real-estate prices have remained stagnant over the past three years, while the incomes of home buyers have increased during the same period. The prices have become affordable now,” Hindustan Times quoted Mayur Shah, managing director, Marathon Realty Private Limited, as saying.

Now, let's also take a look at the resale market. 

As this is the segment where the use of unaccounted money was the highest, sales are likely to slow down, data indicate, by 10 to 15 per cent in the near future. However, the prices are expected to go down only where there was a substantial cash component in the deal; markets in the South may not be as impacted as North as most of the transaction in South were in cheque and demand drafts only. Similarly, in the affordable segment where the price point is low and end users were buying property using home loans and paying the entire amount in white will not be much impacted.

"There may be a correction on the resale properties market, as this segment has historically seen the largest incidence of cash components. Primary sales could also take a hit in Tier-3 cities wherever unorganised developers have been relying on cash components. However, the demonetisation move is very good news for the health of the Indian real estate sector. Combined with the imminent deployment of the RERA, we will see a lot of sanitisation in the industry. The sector will soon become more transparent, credible and attractive to institutional investments. This is a very good time for end-users and investors to make their move, secure the best bargains and look forward to long-term capital appreciation," says YOLO Homes Co-founder and Chief Executive Officer Yogesh Mehra.

Future transactions in the resale category would turn all-white, making deals less lucrative for sellers, who would not save as much on capital gains tax as they would want. This would further push buyers towards investing in the primary market segment. Let's also not forget that the owners of old apartments, who invested heavy money in their properties between 2007-2013 and are still paying hefty EMIs (equated monthly instalments) on their loans will be in no mood to oblige the market with a price reduction. On a whole, the slowdown in demand for resale as well as primary units will not change the pricing strategies of the two segments. 

However, a lot depends on how well demonetisation seeps into the economy. Dr PR Swarup, Director General, Construction Industry Development Council says, "Demonetisation is a move that we can applaud but the key to make this effective is to implement it well. There needs to be more transparency in the system to make this new development work. If that happens, real estate is in for good times."

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