DEMONETISATION – MAY BE A BOON FOR REAL ESTATE INDUSTRY !!!


The demonetisation of high value currency notes has shaken up the real estate sector, marked by transactions involving unaccounted money.

This 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 or black money in the property transactions and illegal money is parked in benami properties.

Majority of the transaction in the end market (apartments and sites) is under mortgage or home loans and the role of black money or the cash is very much limited and especially in a market driven city like Bengaluru the end users are mortgage buyers and there is very limited scope for black money or cash transactions.  But, still, there is little bit of black money rolling in highend or villas or such commercial properties.

But, 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 parking illegal wealth and resorting to speculative buying, which in turn, has been leading to artificial price hike and profit booking.

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.

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.

Affordable housing for all is possible with the Government`s initiative and the market will spring back soon.

As suspected or as reported by many, the real estate market will not go down, but, instead will be more transperant and improve further and the RERA, GST and the Benami property prohibition Act will act as governing guidelines and the genuine builders will be rewarded and the market WILL RISE AS PHOENIX from the ashes of Blackmoney.

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