With the current stock of money suddenly worth nothing, real estate deals, that were anyway sluggish, will be further affected
New Delhi: The real estate sector is going to be most affected by the government’s decision to withdraw Rs500 and Rs1000 notes to tackle black money.
Between 10% to 70% of the value of the property being bought or sold takes place in cash in India. With the current stock of money suddenly worth nothing, real estate deals, that were anyway sluggish, will be further affected.
“The government had been warning and taking steps to curb black money but the market didn’t read much into it. Real estate is definitely going to get impacted in a big way, but the impact will be more on luxury segment or big ticket purchases," said Pradeep Mishra, research head, Indiazhousing.com, a real estate broking firm. “We will definitely see a price correction here although it’s too early to say by how much. In the affordable housing segment the impact will be minimal."
The secondary market will bear the biggest impact of this war against black money.
“At least a third of India’s real estate economy thrives on black money. And this starts right from the time the land is bought," said Gulam Zia, executive director, advisory, retail and hospitality, Knight Frank India. “It’s mainly cash that changes hands whether it’s purchase of land, conversion, administrative pay offs or getting approvals or even buying construction material. So by the time the land is developed a lot of cash has already changed hands and the developer expects to make good the cash transaction by accepting cash deposits by buyers. And so the vicious cycle of black money continues in real estate. The move to curb black money will impact the sector severely."
Rohinton Irani ,43, is not really happy with the way the sudden announcement has been made. He said his househelp who just got a salary of Rs8,000 from two households earlier today (Tuesday) “was distraught when I told her that the Rs500 and Rs1000 notes were banned." Irani was among seven people waiting outside the Kotak bank ATM at Hughes Road in Mumbai to withdraw money.
Irani says it’s also unfair for people who have sold real estate recently. “My friend recently sold a property and he couldn’t get anyone who could give him 100% white money. So he had to settle for a buyer who gave him 50-50 black and accounted money. He is tensed now. For no fault of his, he is jammed," said Irani.
The banning of higher currency notes is a major move which will help curb unaccounted-for cash in the real estate sector, said Anuj Puri, chairman and country head, JLL India.
“We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry," said Puri. “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."
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