PROPERTY PRICES FALL – AN ANALYSIS – PREDICTION


Property prices fall gradually and fall and fall is the prediction

There will be huge stock or apartments or properties in the open market for sale in Delhi, Mumbai, Kolkata, Hyderabad, Pune and most sought after Bengaluru.

The recent BBMP notification regarding the collection of betterment charges and if Akrama Sakrama is notified, then few lakhs of properties will be offered for sale. In Bangalore.

The BDA is proposing to legalise 66,000 sites which has been acquired and this will definitely be questioned in the High Court, but sooner or later will be in the market for sale.

Bangalore will have a huge unsold stock and majority of the healthy (financially) have already bought the property and those very few left, will be choosy.

Yes, property prices will fall more.

The bomb has been dropped on real estate, the immediate effect is not seen or felt, So far that it’s simply not visible anymore! And with the demonitisation, without doubt, the land and property markets in India will take a big knockdown.

It’s no secret that the property markets in our country were hugely inflated.

They are an easy place to park undeclared money and evade taxes.

 

And for everyone claiming otherwise, there’s a simple enough argument. Any apartment or home you buy should give you, at the very least, inflation + 1% rental return. The current consumer inflation in India averages 5% per annum. Do the math. Will your apartment which costs Rs. 1 crore fetch you Rs. 50,000 as rent every month? You’ll be lucky if you can get Rs. 30,000, or a 3% rental yield. The defenders of the property bubble always wanted you to believe that India is not a property market for rental returns, but for capital appreciation. In short, they insisted property was the best way to multiply your money.

Of course it was, especially because cash was keeping the capital appreciation going. Even if the first-time home-buyer took a loan and bought a property the proper, accountable way while using cheques, when it came time to sell that house at a profit and declare the capital gains, more often than not, he or she decided to take the well-evangelised, institutionalized route: accept 20% to 30% of the sale value in cash. Cheat on taxes, use that cash to buy a larger property, and, in the process, artificially inflate prices.

Top industry voices corroborate this round-robin of cash bubble in India’s real estate which has made buying a home unaffordable for a majority of Indians.

“Large and organised housing developments in India’s top seven cities have cleaned up over the years. The ability of developers to collect cash while selling 100-200 apartments is very difficult. My hesitation in calling it clean is in the secondary market and transactions on land” says the head of real estate firm.

“You will see a lot of secondary market transactions coming down in volume. For every ten buyers out there, there is only one buyer willing to pay all-cheque. And usually, people want to take at least 20 to 30 percent of the amount in cash, but this will now go away. This will also act as a big de-motivator for people who were generating more and more cash to be able to park into real estate all this time. It will create a lot of transparency in the long term, but in the short term, there will be a lot of pain,”

  1. For a while, property sales will freeze. Be it land, primary apartments or secondary sales. The psychological blow is a big one.

    Sellers waiting on the side lines will now see the writing on the wall. With black money sucked out, there is very little hope of prices climbing up soon. So desperation will creep in and with it, prices will drop.

    3. Prepare for the largest blow to be felt in luxury and ultra-luxury properties. In cities like Hyderabad and Pune, this could mean a price tag of a crore, in Gurugram, 2-crore plus and 3-crore plus for Mumbai.

    4. Cash business cities like Lucknow, Jaipur, Surat, Rajkot, Patna and Madurai will melt. There’s no way out.

    5. And if anyone will brave the tsunami, it’s the budget and affordable homes priced at 50 lakhs and below. There is enough pent up demand for these. Every correction will bring in new buyers.

    The good news is that once the shakeout happens and black money is drawn out of the system, right-priced homes will be built for those who want to live in them.

  2. In the war against corruption, the government of India’s decision to discontinue the Rs 500 and Rs 1000 notes is one of the biggest blows to those who earn and stash black money. Its implications run far and wide. First, it renders all black money held in cash in the form of these notes worthless at the end of December 30, 2016. Two, it immediately invalidates all fake currency floating within the country. It’s also a big blow to election funding and is sure to impact the Punjab and UP elections scheduled next year. But more importantly, it forces black money hoarders to find new and innovative way to stash the ill gotten wealth.
  3. As of March 31, 2016, Rs 16.5 lakh crore of currency was in circulation. A vast majority of that was being stashed in large currency notes by hoarders in the form of black money earned either through corruption or ‘cash only’ transactions.
  1. Only those who have earned their money through legal means will have the courage to deposit it back into their bank accounts by the December 30, 2016 deadline. For those who have earned through illegal means will now be in a bind since their money held in these notes is as good as trash at the end of the deadline.
  2. What does this mean for large black money possessors? Their first port of call will be–you guessed it right-GOLD. That’s the eternal safe haven for every crisis. Expect demand for gold and other such investment avenues such as diamonds and silver to shoot through the roof not just until the deadline, but well after that. That is, until the government finds a way to tap sale of gold across the country as well.
  3. Prices of property, which is already hitting the trough, is likely to go further down since a vast majority of property in India has traditionally been bought in cash through such black money stash. Nearly half of all property transactions are believed to be black money and benami transactions.
  4. According to the Reserve Bank of India, Rs 500 notes account for 45 pc of all notes in circulation while the Rs 1000 notes account for another 39 per cent. Nearly 16 billion Rs 500 notes and 6 billion Rs 1000 notes are in circulation currently. In one swoop, the government has discontinued 84 per cent of all currency notes in circulation. That explains why the banks and ATMs across the country need to be shut for 2 days to put this into effect. It would cost the RBI in excess of Rs 10,000 crore to print fresh notes to replace the Rs 500 and Rs 1000 notes with the new Rs 500 note and the Rs 2000 note.
  1. At various points proposals have been floated for higher denomination currency such as Rs 5,000 and Rs 10,000 notes. However, fearing higher black money stash, the government has repeatedly kept such proposals in abeyance. Estimates of domestic black money range from a quarter to our GDP to 2-3 times the size of our GDP.
  2. This may be a radical step with the aim to curb black money but isn’t the first such case of currency discontinuation in the world. Earlier this year, the European Central Bank said it was considering demonetization of €500 notes. Even in the US, there have been calls to stop fresh issuance of $100 bills for a while now. In 2010, 2.6 billion $1 bills were destroyed in what was one of the world’s biggest currency destruction at that point.
  3. Land and property prices, particularly those of luxury homes, are likely to come down in the short to medium term as a result of the government’s bold move to crack down on black money by scrapping Rs500 and Rs1,000 currency notes, said property advisors and company officials. Land transactions and luxury residential segment would be impacted the most because they employ the maximum black money. In the short term, land prices and prices of luxury homes will see a correction of around 20-30%,”
  4. In a TV interview, Deepak Parekh, chairman, HDFC, also said real estate prices would come down in the short to medium term as land would become cheaper.
  5. “Land transactions are mostly done in cash. This will put an end to it. I expect real estate prices to come down. People would not be able to take cash. They have to declare it. They have to pay tax on it,” Parekh said.
  6. However, a few developers are not convinced that real estate would be impacted significantly though it would help reduce corruption in the long run.
  7. “The primary real estate market would not be impacted as it is already regulated to an extent. Even land transactions in cash has significantly reduced in the last few years,” said Getamber Anand, president, Confederation of Real Estate Developers’ Association of India (Credai).
  8. On a long-term basis, real estate developers said the government’s decision to curb black money would reduce corruption and bring transparency into the sector.
  9. “The impact of this will be huge in many markets where payment of cash is mandatory and the major form of profit-taking. These markets will see a major crash making an already difficult situation even more challenging,” said Rohit Gera, managing director of Gera Developments.
  10. “In addition to eliminating black money this will definitely bring down corruption at least for a while. In the medium to long-term the policy that emerges will determine how much corruption will return in due course,” he said.
  11. t’s not a secret that in the deals involving the sale-purchase of plots, flats, houses and commercial property still involves a combination of ‘cheque’ and ‘cash’ component across India. The cheque component is what is often termed as ‘white’ or legitimate/accounted money (paid as per the prevailing circle rate) while the cash component refers to black money which is paid as the balance amount of the ‘actual’ deal value (which tends to be much higher than the circle rates across geographical locations).

    “A number of property transactions continue to involve the white and black components even today. Typically, such deals are 20-30 per cent higher than the circle rates. Theoretically, the demonetization of the existing Rs 500 and Rs 1,000 notes should lead to the correction of property prices in the vicinity of 20-30 per cent across property hotspots,” says a senior associate in a real estate consultancy firm as his early reaction to the big news. “We will need to study the full impact of it in coming days,” he adds requesting anonymity.

    The prices of real estate is expected to dip across the Tier-II and Tier-III towns where a large chunk of the property transactions tend to involve the cash component.

    Getamber Anand, President, CREDAI National says the primary market will not be very disturbed as the inventory was sold to end users who avail home loans. “The organised part of the real estate industry has always been compliant,” Anand adds stating that it is only the unorganised fly by night players who will be affected. In fact Anand went one step further to add that with the demonetization of the Rs 500 and Rs 1000 currency notes, “this move will help 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 the buyer and seller post this move.”

    DLF CEO Rajeev Talwar termed it as a “step in the right direction”. “We are moving toward the cashless economy which is a sign of maturing economy. The blackmoney was mostly in land purchase. But in last 6-7 years, there has been no major land buying in this sector. Big builders and organised players are already using bank channel and they would gain from this decision. Unorganised players and the secondary market would be impacted,” he said.

    Asked about impact on real estate sector especially housing, Talwar said: “There could be downward pressure on prices, which will boost demand”.

    Explaining the impact of it on lenders, Gagan Banga, VC& MD, India Bulls Housing Finance termed the move as “very innovative” and “extremely good” for the Housing Finance Companies because the element of cash will now reduce and formal credit demand will increase.

    Anuj Puri, Chairman & Country Head, JLL India said, “The banning of higher currency notes is a major move which will help curb unaccounted-for cash in the real estate sector. We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry. The effects will be far-reaching and immediate, and shake up the sector in no uncertain way. Stricter measures against black money have for long been required to help bring about greater transparency, give the Indian real estate sector more credibility and make it more attractive for foreign investors. Black money deals are more common on the unorganized market, but this practice has, in fact, been on the decrease with greater awareness on the part of buyers. Before too long, the caricatured version of black money driving Indian real estate is no longer applicable.”

    According to Feroze Azeez, deputy CEO of Anand Rathi Private Wealth management, there could be a 20-25 per cent decline in residential property prices in the big cities as a result of the announcement.

    Various reports suggests that there are around 7-8 lakhs unsold flats lying across the top 10 cities in India. “In all probability, many builders and property dealers holding on to unoccupied or unsold inventory may like to sell them at lower price points because the consumer’s ability to pay in white component is limited and in the absence of cash dealings, selling unsold inventory makes sense,” said another reals estate analyst.

    “There are eight lakh apartments in top cities that are unsold.. These buildings will now be sold at a lower price as the buying capacity with white money will be lower,” he said, adding that he expects a 20-25% decline in residential property prices in the big cities.

    According to the Reserve Bank of India, there are 16.5 billion ‘500-rupee’ notes and 6.7 billion ‘1,000-rupee notes in circulation right now. In percentage terms, of the total available currency in circulation, around 80-85 per cent are in a combination of Rs 500 and Rs 1,000 currency notes. Demonetization straightaway impacts 80-85 per cent of the available currency.

The much-awaited push for making homes reasonable for end users is here. The government’s decision to ban Rs 500 and Rs 1,000 currency notes is likely to hit the real estate sector hardest. As a sector that’s identified for menace of black money, real estate is now likely to shift towards improved transparency.

 

  1. The move will probably push property prices, including land prices, down as investors will not be able to utilize their cash in real estate and thereby forcing builders to sell at lower prices. Of the property markets, Delhi-National Capital Region (NCR) is likely to see a hard landing as the market is known for highest involvement of cash component.

 

  1. Yashwant Dalal, president of the Estate Agents Association of India said that property markets will see around 30% correction in prices. Even builders who aver that they accept only cheques will also be forced to trim down prices given the market conditions around them. Land prices will also move downward as these deals used to see at least 30% cash component. Apart from big property markets, tier II and III cities will be worst affected. Tier II cities are the cities with population of around 1 million and are usually are regional hubs like Pune, Coachin, Mangalore, Dehradun etc. Tier III cities include cities like Nasik, Baroda, Trichy, Madhurai etc which has the population less than 1 million.

 

  1. The practice of investing unaccounted wealth is extensively prevalent in real estate and the government’s latest verdict is likely to make things tricky for developers. There can be an increase in projects getting stuck as developers may go slowly on construction given the liquidity stress for them.
  2. Rajeev Talwar, CEO, DLF and chairman of realtors’ body NAREDCO made a statement saying that there is bound to be a downward force on prices of everything including real estate. This can be a good chance for end users to buy their dream homes. Sale of plotted developments will be hit nastily. The move will lead to a more transparent sector.

 

  1. While the panic is prevalent among property brokers, developers and other market participants, some are happy that the move, together with implementation of Real Estate Regulatory Act will cleanse the sector.

 

  1. Vikas Oberoi, CMD, Oberoi Realty stated that this is the most positive and remarkable decision that would lead to cleaning up of the system. It will assist in improving the country’s image and attract more foreign investments. Undue advantage that some developers dealing in cash enjoyed thus far has now disappeared.

 

  1. Given the existing stock across the major property markets, the impact will be gigantic in several markets where payment of cash is compulsory and the chief form of profit taking for developers as well as investors. These markets will see a major collapse making an already difficult situation even more challenging.

 

  1. In the quarter ended September, unsold stock across tier-I cities rose 12% and was credited to new launches with utmost increase seen in Kolkata, followed by Ahmedabad and Mumbai Metropolitan Region.

 

  1. Affected Stocks:

 

Stock Name Prev. Close Opening Price on 9/11 % change
DLF 143 129 -10%
Oberoi Reality 338 290 -9%
Godrej Properties 359 295 -8%
Prestige 183 163 -15%
Phoenix Mills 362 325 -10%
IndiaBulls Real Estate 80 72 -14%
HDIL 74 67 -13%
Omaxe 166 164 -1%
PNC Infratech 115 106 -6%
Sobha 270 240 -9%
Brigade 174 160 -9%
Sunteck Realty 275 227 -17%

The withdrawal of Rs500 and Rs1,000 notes is all set to impact the realty sector. While the builders who are already hassled by the slowdown rued that it will make the situation worse, there are indications that realty prices may reduce.

Builders who used to take 20-40 % of money in black in many transactions and even the investors who parked their undisclosed amount will now shy away from the market.

According to a leading builder who refused to be quoted, the move will hit them severely. “Many of the homebuyers preferred to pay in cash to save taxes, which ranges up to 15%. In addition, there are many suppliers for whom we need to make payments in cash only. Their payment will be a headache now,” said the builder.

The ready reckoner (RR) are the assessment values of the property, which play an important role in determining the stamp Duty and registration fees. In most places, the gap between the RR and the market value is in the range of 10 to 40 %. Builders used to take cheque of the amount calculated in RR and the remaining gap amount in cash.

For years, real estate was infamous for parking unaccounted money and builders also preferred to take money in cash.

Many experts have called this a welcome step which will bring about transparency in the realty sector. According to Anuj Puri, Chairman & Country Head, JLL India, a leading real estate consultancy firm, banning of higher currency notes is a major move which will help curb unaccounted-for cash in the real estate sector. “The effects will be far-reaching and immediate, and shake up the sector in no uncertain way. Stricter measures against black money have for long been required to help bring about greater transparency, give the Indian real estate sector more credibility and make it more attractive for foreign investors,” said Puri.

  1. The realty sector, which thrives on black money transactions to evade taxes, could be one of the worst affected by the  government’s move to “demonetize” Rs 500 and Rs 1,000 notes will. The real estate sector in India contributes about 11 percent of the gross domestic product (GDP). Investment in property is a common means of parking unaccounted money and a large number of transactions in real estate are not reported or are under-reported. This is mainly on account of very high levels of property transaction taxes, commonly in the form of stamp duty. A government white paper on black money tabled in Parliament in 2012 had noted that “the property market remains one of the most inefficient asset markets in India. Unless the underlying distortions in this market are taken care of by appropriate reforms, it may be difficult to prevent such misuse”. About a third of India’s black money transactions are believed to be in real estate, followed by manufacturing and shopping for gold and consumer goods.
  2. For instance, X sells a plot of land to Y at Rs 20 crore. Y pays 50 percent (Rs 10 crore ) in cash and the balance in cheque. X deposits the cheque of Rs 10 crore and withdraws part in cash. X Places a request before bank to for a demand draft of a huge amount to purchase gold or bullion for business Black money arises mainly from incomes not disclosed to the government  usually to avoid taxation and sometimes because of its criminal links About two-thirds of India’s GDP run on cash — about Rs 88 lakh crore a year. For instance, grocery is bought and services are paid in cash. The move will also affect money laundering in concealing the source of illegally gotten money. Hawala is a parallel international banking system based on trust where money moves without leaving a trail.

 

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