Hard For Real Estate To Escape Modi

Prime Minister Narendra Modi announced the demonetisation of Rs 500 and Rs 1,000 notes from India’s financial system in the evening of the 8 November. Interesting is the method in which these old notes are to be deposited and exchanged partially for new notes, as per the rules declared by Modi that evening. The new regime has made it difficult for real estate players to dodge the state.

The system reminds one of Abhimanyu, the son of Arjuna. During the Mahabharata war, the Kauravas had made a special battle formation called the chakravyuha. Abhimanyu had the knowledge of piercing and entering it. However, he did not possess the knowledge of emerging out of the battle formation unscathed. Unaccounted Cash Money (UCM) is in a similar predicament at this point. UCM can be deposited in the bank, but no one can ensure it can be withdrawn or how much of it can be withdrawn. That the tax authorities will watch all the monies coming into the banks with an eagle eye is a given. Withdrawal will have its own side effects. Abhimanyu despite his best efforts perished in the chakravyuha; UCM is headed for a similar fate.

Indians are witnessing one of the largest money transfers in the history of mankind. Private Unaccounted Wealth is being converted to Public and Private accounted wealth. These measure(s) will have an enormous impact on the real estate market. It will be felt in valuations, speed, transactional transparency and stamp duty among others.

Valuation impact

In much of the Indian real estate, land, in particular, is valued dually with portions of the black and white component together constituting the final price. With the cash component going away (as of now), and no replacement in sight, a major downsizing in real estate prices is already happening.

Within an urban geography, the cash component is different for different jurisdictions. Higher the cash component, more the revaluation in pricing. Some cash component pricing would be converted into the legal value and some of it will go away.

Impact on speed

The volume of sales will be down and transactions even slower than what it is today, as buyers will wait to ensure lower prices. In high cash jurisdictions, the impact on sales will be severe. Volumes will drop drastically.

The dual impact of lower prices and lower sales volume and the consequence of RERA (Real Estate Regulatory Authority) may drive a lot of developers out of the real estate market.

Transaction transparency

With the cash component out of the way, the opaque system of maintaining dual ledgers, multiple accounting, cash handling will all come to an end.

The professional CAs, professional billers, entry experts, cash cheque swappers, hawala and angadias are headed for a major change. Land brokers and realtors will have to adjust to the new normal, too.

Developers who used to treat customers with contempt will be out of the system as well.

Stamp duty

Despite the withdrawal of the cash component, the government will realise more stamp duty. The reason is that the legal pricing of properties will appreciate. So, for the Narendra Modi government, this is a win-win situation.

Above all, this measure indicates the return of primacy of the government. Earlier, with so much of cash in the market, government decisions were ignored, manipulated and laughed at. That is no longer the case. By converting and ultimately reducing the cash in the market, the government will now exercise complete control over real estate.

CREDAI (Confederation of Real Estate Developers Associations of India) has come out with a statement that nothing, including pricing, will change due to demonetisation. The statement betrays an ostrich-like attitude. Everything is changed now. The real estate market has this great opportunity to change itself by embracing this demonetisation drive and supporting this fantastic move by the prime minister.

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