DeMo and its effect on the real estate market

Even as the PM made the earth shattering public address on November 8th , while the ordinary citizens of the nation went into an over drive in social media well late into that night, most of the kaaladhan wallahs were wondering what had hit them – this was nemesis indeed for this section who have always believed paying taxes is for the sissies.

Traditionally real estate is the ideal parking yard for high value cash stashes, where everyone who is someone, loves to mouth terms like 50:50, 60:40 and the like while finalizing deals. DeMo was a surgical strike on those in this industry whose brazenness was going unchecked all these years. A microscopic minority in the real estate industry who deal only with accounted money and in non-cash form and who had all along felt they were losing out on good property deals owing to their inability or unwillingness to transact in black money, felt vindicated.

Black money plays… or rather was playing , a very important role in the property transactions between individuals – not that corporates don’t do that, just that they do it differently - and we can put the weighted average black component at around 30% on pan-India basis, based on empirical evidence. In some cases it is as high as 70%; in some cases it is a meek 10%; but 30% will be a pretty close figure for an average.

What exactly will the effect of this currency-wapsi be on real estate prices?

Let’s consider, in future transactions cash would be fully absent, for argument sake. We all know a person holding a particular amount of unaccounted cash will not let go of it without a fight. He can and he would successfully launder about 50% out of this 30% using multiple accounts of family members, through some commission agents and in some specified expense heads where old notes are permitted, without adverse notice; the remaining 50% will be necessarily taxed at penal rates and he will lose about 80% of it; that is to say he will be left with just 3% as tax-suffered white money; adding the laundered 15%, the net amount he protects is 18%; in other words, such a person ends up poorer by 12% on account of this demonetization. Of course, there could be lot variants of this…but broadly this will be the pattern.

That is to say, 12% of the money which was available for property purchase in pre-DeMo days has been ceded to the Government. So the demand for real estate at a macro-economic level has to adjust to this new normal. The economic activity and demand for properties was remaining weak even earlier; excess supply of residential stock in all major metro cities and suburbs continues unabated; add to these, the falling investments and the likely shrinking of economic activity at least in the near term, the psychological effects of currency recall on the investors and property buyers, we have a heady cocktail. In these days of uncertainty, likely buyers of housing stock will prefer to maintain liquidity of their investments at a level higher than the earlier scenario. So cumulatively we can put the money available for property investment is less by 20-25% after this disruption.

It is proven wisdom, the black money is definitely not with those looking for budget homes; even if available, it will be abysmal. This segment is actually in an advantageous position owing to falling interest rates, additional FSI concessions, service tax exemption, interest subsidies and tax breaks on profits announced for low budget housing. In fact this segment could see a potential increase in demand owing to the positive signals from Government and stagnant land prices. Hence, I reckon, the prices in this segment will not see any notable drop as the demand will be robust.

It is the upper/upper middle class and richer segments who have such funds …and the businessmen/politicians/sleazy officials/those with cash stash from property sales…these people need to convert the cash into realty form….quicker the better. It is this segment that has taken a big hit. Developers and property dealers catering to this segment, will have to drop the prices significantly for two reasons viz. reduced money in the buyers’ hands post-DeMo and their own need to redeem their investments.

As the demand is shrinking owing to less cash in the hands of potential buyers, as per economic theory, the prices ought to fall to establish a new equilibrium. Where exactly that equilibrium in this segment would get set depends on many variables, including several local factors, most of which are still uncertain.

What of course will be certain is that the prices of properties in this higher segment will have to move southwards and I would put the drop anywhere between 15-20% in the medium term.

In the meantime, we hear DLF’s Renuka Talwar, buys a property in Lutyens Bungalow zone for Rs.435 crores…needless to say this uber zone is recession-proof!

Jai DeMo!!!

Dated 23rd December 2016

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