Demonetization today is becoming synonymous to chaos, confusion and inconvenience. However, putting aside the short-term perspective, it is bound to come as a blessing in disguise, as India is set for a digital revolution and the overall payments landscape of the country is up for a complete overhaul. Delivering his speech at an event recently, Mr. Ravi Shankar Prasad, Law and IT Minister, said that with digital transactions money will come into system, it will be accountable, generate tax and develop the country’s economy. When money will come into banks, the government will be able to come up with better welfare schemes. This will actually strengthen government machinery for better implementation of schemes.
For real estate, it might be a short-term itch — particularly for land deals, commercial transactions, hospitality or retail. Small builders and those in specific cities/ micro markets where cash dealing was more prevalent will be most impacted. Registration prices in residential space may also go up to adjust for cash component. Therefore, resale of property will be impacted more than primary sales. Organized real estate sector may also face demand slowdown for a short while, largely due to ‘wait and watch’ susceptibility of buyers and investors.
However, gradually, once banks have a high lending capacity with money in the system, we will see a decent lowering of interest rates. Lower interest rates will bring down the EMIs on home loans, making real estate more affordable and attractive. Precedents suggest that low interest rates give the real estate industry a massive boost by escalating positive sentiment and demand, especially in the residential segment. Also, if supply of resale properties declines due to price crash, it may favorably impact primary sales. We also need to consider the fact that while real estate comes as an asset and offers handsome appreciation with time, it also helps in income tax deductions. Rentals also add as an earning potential from a property.
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Also, as a positive impact of demonetization, banking systems are bound to witness a windfall of funds, increasing their lending capacity and in turn driving down the interest rates. High lending capacity of banks offers benefits to overall industrial and business ecosystem, strengthening the overall economic conditions of the country. Therefore, in the longer run this will have an upward impact on the purchasing power of the people instigating demands in all sectors, including real estate. The year 2016 has witnessed some positive and potentially long-lasting changes being introduced in the Indian real estate. The passing of RERA (Real Estate Regulation and Development Act 2016), the Benami Transactions Act and now the demonetization move will ensure that going forward, the sector will lose much of its historic taint and become more transparent. These moves will ensure increased transparency, improved investor confidence, better access to funding and higher FDI.
So, if we have to measure an overall impact on the real estate sector, it can be safely said that real estate will be a much more attractive investment option than volatile / lower-return offering bullion, equity or bank deposits. The Indian real estate sector will emerge stronger, healthier and capable of long periods of sustained growth. As of now, there is no reason for developers and investors, who have conducted their dealings transparently and legally. to panic.
(The author is President-Accounts & Finance, M3M India Pvt Ltd)