Foreword

Major analysts & commentators have hailed

demonetization as a bold move which can induce

significant reduction in black money and

hoarding of cash in the times to come.

Nevertheless, there has also been concern &

criticism emanating from various quarters about

the rising inconvenience for the public.

Squaring the diametrically opposing views on

demonetization; we at Square Yards believe that

it can entail significant positive impact on the

Indian real estate industry- primarily by

rebooting the existing outlook & approaches &

pioneering new fundamentals. The

demonization will repeatedly question, the age-

old practice of buying real estate as a safe

parking for black monies. This in turn will

encourage primary estate & transparent

transaction mechanism.

Credibility of the developers, its annual books &

past records will come also increasingly come

into play as key points to ponder before going

ahead with any deal. All these in tandem will

beckon a completely fresh & new paradigm in

real estate transaction process.

In the short to mid-term notable price correction

in the secondary real estate could be seen due to

higher involvement of cash components.

In tandem, this might facilitate exponential

increase in institutionalization. Major

institutional players such as banks, private equity

houses, that till now were questioning the

opaque & unorganized nature of the industry,

will suddenly feel incentivized to invest into the

changing real estate dynamics.

Square Yards has compiled this study to let users

understand more deeply about how the

demonetization drive is going to impact the real

estate industry. This white paper is a collection

of various individual analysis done by the team

over the past few weeks & can give an in-depth

understanding about how the things might

evolve post demonetization.

Editorial Team

Square Yards Research

Introduction

Prime Minister Narendra Modi’s announcement

of the discontinuation of currency notes of 500

& 100 denomination is a landmark policy

decision which will have a far-reaching impact on

the Indian Real Estate.

Significant reduction in black money and

hoarding of cash is expected. The secondary real

estate would be severely impacted by this step

because of the currency involvement in such

transactions. The primary real estate market will

be slightly less affected as it is far more

structured and less exposed to cash dealings.

A short-term crash in secondary real estate

prices can be expected and this could be as much

as 20-30% which will be good for the sector as

yields will go up and volumes will return to the

market. This correction will be more of a short-

term thing, as long-term fundamentals of Indian

Real Estate still say strong. The rental yields from

properties are also expected to rise. The

economy is doing better than before and the

currency overhaul will only lead to further

progress in the economy.

With a more transparent outlook, Indian real

estate, will now come at par with global

standards and help it achieve a significant status

in the global real estate market.

So, should one still consider real estate

investment?

Definitely. With black money disappearing from

the scene, this would be a major step towards an

organized and transparent real estate market.

Once the initial knee-jerk reaction settles down,

significant volume jump should happen.

It will also change the way how real estate is

transacted in India. Online aggregators like

Square Yards have been working hard towards

creating an ecosystem of transparency and

accountability dealings in real estate. This move

will aid their efforts. Also, a lot of secondary

market brokers will consolidate. We will also see

the share of volumes of non-cash primary

transactions rise. The demand for online

aggregators and organized consultants will go

up. As a proxy play to developers and asset plays,

aggregators should attract more interest now.

However, the immediate fallout would be on

asset prices, which will fall, giving impetus to

high volume sales. This is the beginning of

organized real estate market in India.

What is Demonetization?

Demonetization means that Reserve Bank of

India has withdrawn the old ₹500 and ₹1000

notes as an official mode of payment.

According to Investopedia, demonetization

is the act of stripping a currency unit of its

status as legal tender.

Impact of Demonetization in

India:

1) Black Money: Black money stored in the

form of ₹500 and ₹1000 notes will be taken

out of our system. As predicted by ICICI

Securities Primary Dealership the

government's plan to scrap ₹500 and ₹1,000

notes will uncover up to ₹4.6 lakh crore in

black money.

2) Terror Funding: Fake Indian Currency

Notes (FICN) network will be dismantled by

the demonetisation measures. Taking out

500 and 1000 rupee notes out of circulation

will have a lasting impact on the syndicates

producing FICN's, thus affecting the funding

of terror networks in Jammu and Kashmir,

North-eastern states and Naxalite hit states.

3) Real estate may see significant course

correction: The demonetization decision is

expected to have far reaching effects on real

estate. Resale transactions in the real estate

sector often have a significant cash

component as it reduces incidence of capital

gains tax. Black money was responsible for

sharp appreciation of properties in metros.

4) Political parties in crisis ahead of polls:

With nearly five state elections in 2017,

demonetization has stunned political

parties. Especially, in large states like Punjab

and Uttar Pradesh, cash donations are a

huge part of "election management”. In one

stroke, big parties will find themselves

hamstrung as cash hoards are often

undeclared money. Parties will have to

completely rejig campaign strategies in light

of expected cash crunch.

5) Moving towards digital payments:

Demonetization will likely result in people

adopting virtual wallets such as Paytm, Ola

Money etc. This behavioural change could

be a game changer for India. Govt. is also

introducing schemes of discounts for digital

transactions. E.g.: Fuel stations/Railway

tickets/Life Insurance etc.

6) Temporary chaos and confusion: Public

will face minor problem for a few days owing

to the scarcity of lower denomination notes

in the system.

7) Reduction of interest rates – With rise in

deposits with banks, there is increased

likelihood that interest rates would fall in the

near future.

Impact on Indian Real Estate

Impact of Demonetization on Real Estate?

Real Estate Investments can be broadly

divided into 3 segments

a. Primary Sales

b. Resale

c. Land Transaction

Impact on Primary Sales: NO, because the

new property market which is primarily

driven by home loans usually has minimal

cash component in its transactions. Chances

of prices coming down in the new property

market as a result of demonetization is very

low.

About Primary Real Estate Market

Primary real estate in simple terms is the

fresh inventory sold out to buyers directly by

developer or builder. It is called primary

because it represents the first sales cycle. As

and when a resale of the property happens,

it goes into the secondary market zone.

Black Money & Primary Real Estate

Although black money does find its way in

the primary real estate, it is very insignificant

part of the payment system. This is majorly

because builders and developers have their

own obligations with banks and financial

institutions. They would always prefer a

payment by cheque rather than cash. Also,

many realty companies are public limited,

listed entities which have extra oversight on

their finances. So, it leaves very little

incentive for them to accept cash.

There have been little talked about incidents

regarding bribery for getting clearances

making builders indulge in cash payments.

However, very less of this has been proven

or clarified by government agencies.

Effect of Demonetization on Primary Real

Estate

Although property prices are expected to fall

but we do not expect a significant decline in

the primary real estate in major markets.

This is because, the prices are already at

quite reasonable levels, with grade A

developers pushing through volume sales.

The primary real estate also attracts a larger

share of end users who are buying homes to

live and reside in. That demand will still stay

on especially with the salaried class eager to

add real estate in to their portfolios.

A major shift also could be seen from

unorganized players to organized projects.

Volumes thus would increase at this level as

people look for quality real estate

investments which have clear and known

payment structure. Many small players who

have black money exposure will struggle,

encouraging people to look for known brand

names.

Primary Real Estate will also see more

transparency and clear pricing something

which has been sort of work in progress.

Also, many developers have tie-ups with

lenders which makes it easy for buyers to

make the payments. A fair amount of

transactions take place through mortgage

route in the primary market, further

cushioning the impact of currency

demonetization.

Overall, it only bodes well for the primary

real estate market in India as it is a step

forward in the right direction.

Impact on Resale and Land transaction: Yes,

because resale & land transactions have

always had cash as a major component in

their transactions and are likely to see a price

correction. These segments will see some

distress sale happening in short & medium

term. High value properties are likely to see

a higher price correction in short term.

Positive Impact on Real Estate

1. Realtor's body CREDAI said real

estate prices has a chance to rise by

about 20% in the next one year

post demonetisation as builders go

slow on new launches, introduction

of the new regulatory bill and higher

input cost.

2. New launches are expected to dry up

rapidly as realtors adopt a wait and

watch approach and customers

anticipate a further drop in housing

prices. The situation will be

aggravated as new approvals will be

slow and builders will have to be

more compliant with the Real Estate

Regulatory Act (RERA) which comes

into effect next year.

3. "The idea of a drop-in housing prices

by about 20-30% is far-fetched.

Builders, at least in Bengaluru, are

working on wafer thin PAT (profit

after tax) margins of 8-10%. There is

no scope of further decline," Credai

chairman Irfan Razack.

4. "The RERA will put a lot of

unorganised players out of the

market as they will not be able to

start any project before they have all

requisite certificates with them.

Moreover, approvals have been slow

and input cost, including labour cost,

is set to go up," said Razack.

5. Sobha Managing Director J C Sharma

said the move by the government

would result in lowering of lending

rates thus making housing more

affordable to all. "We require about

4.2 million homes in the next four

years and with supply shortage,

prices can only go up,"

“Though exact data is not available, various studies done in the past

suggest that 25-35 per cent of the transactions are done through cash.

In tier-2/3 cities, the cash component accounts for over 50 per cent,”

Hitesh Singla, Principal Partner, Square Yards

Source: HinduBusinessline 11, December,2016

End of Black Money: What next for Indian Real Estate

Demonetization has signaled an end of an

era of cash transactions in Indian Real Estate.

Sure, cash can still be used, but it seems that

use of cash will decrease drastically in real

estate transactions, perhaps a first in India’s

modern history. Black Money, experts say

will disappear (most of it anyway) from real

estate markets across India. So, what does

future look like for the Indian Real Estate?

1) (End) Consumer is the king again – With

the reduction of unaccounted cash, the end

user would be the prime focus of attention

for builders and developers. Small time

investors, with large cash at hand, hoping to

make quick bucks often ended up inflating

prices. There have been instances of

apartments being sold to multiple people

even before possession was handed over.

This was because of investors cashing on

even a slight increase in price. Now, end

users will be direct beneficiaries as a whole

class of investors disappear. Sure, there

would be investors too but only serious

investors with long-term investment

horizon.

2) Black Money out, technology in – Over

the years, start Ups like Square Yards have

been developing propriety technology to

bring in a fair and easy payment system for

real estate transactions. Now with cash

playing a minor role, technology will be used

big time. Take, for example, the booking

engine developed by Square Yards where

prospective buyers can pay booking amount

online, through cards from the comforts of

their home.

© SquareYards.Com

3) Correction in prices – A correction in

prices is expected across property segments.

However, it is yet to be seen how much it

could be. Going forward, one can expect

more stability in prices as black money used

to have the power to disrupt prices. Clean

markets are more stable, secure, and

transparent.

4) Transformation of brokers – Brokers and

consultants have a pivotal role in real estate.

The removal of black money from the system

will move brokers towards consolidation.

Brokers would have to get adjusted to the

new money order and tie up with larger

consultants to be more formally organized.

5) Status rise for Indian Real Estate – At

present India is not considered as a major

real estate market globally. It is very opaque

and not at all easy to invest in. With

the economy going clean and transparency

coming in, India is now inching towards

global standards and best practices in real

estate transactions.