Demonetization, Right time to invest in Real Estate – D B Mehta
Mangaluru: “The government claimed that the demonetization move is an effort to stop counterfeiting of the current banknotes allegedly used for funding terrorism, as well as a crackdown on black money in the country. The move is also aimed at reducing corruption, drug menace, and smuggling. With Economists and Experts and Media fighting over giving commentary on the after effects of Demonetization, we would like to detail below the myths and facts surrounding Demonetization especially with regards to real estate sector”, said the president of CREDAI D B Mehta in a press meet held at the press club Urwa here on November 30.
Addressing the mediapersons Mehta said, “On 8 November 2016, an announcement was made by the Prime Minister of India in an unscheduled live televised address to the nation. The PM declared circulation of – all Rs 500 and Rs 1000 banknotes of the Mahatma Gandhi Series as invalid effective from the midnight of the same day, and announced the issuance of new Rs 500 and Es 2000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes”.
MYTHS:
A. House/Apartments prices will drop by 30% or more.
B. Land prices will come down by 50% or more.
C. GDP growth will come down and Unemployment will increase.
FACTS:
A. The price level will fall initially but will recover as soon as the Central Bank pumps in new currency to the market in replacement to the old currency. Hence no fear of deflation.
B. Indian Economy will see a change in the means of the transaction from cash to the bank or digital only and purchasing power of money would increase leading to the growth of the economy. Only the rural areas will have difficulties in the initial stages but will soon recover once the Central Bank infuses fresh currency into the Market and digital economy has a wider reach.
C. Apartments prices may see a small decline only in the initial stages of demonetization more out of liquidity issues than anything else but will recover immediately once the changes in means of the transaction are implemented from part cash to either 100% bank or digital. Demonetization will only reduce the land prices to 15% but not the actual cost of construction or taxes. Taxes contribute more than 30% of the total cost. Land prices constitute only 30% of the cost of the apartments in Tier II city like Mangaluru. The decline in prices of apartments will be minimal say about 5%.
D. Real Estate has been a slowdown for the last two years and prices of Apartments have already come down by almost 10%. There is no room for further reduction as most Builders are selling at a very low margin or even at losses. All the Stock exchange listed real estate companies have come down in value by 50 to 75% in the last two years with a decline in profitability. This in itself is a testimonial of no further room for a decline.
E. The overheated premium pockets in cities like Mumbai, Gurgaon, Pune, Chennai and Bengaluru would have scope to correct by 10 to 15%. But even in Tier I cities the suburban areas or outskirts have very little scope to correct. Tier II & Tier III cities have hardly any scope for prices to fall further. Commercial properties may have a little larger correction.
F. The new Projects launch has come down by 30 to 50% in the last one year and will further decline. This will reduce the future supply drastically.
G. However the land prices have not fallen. The decline in land prices in Tier I cities may be to the tune of 25% as large parcels of land is held as trading stock which may get offloaded in the market. Whereas the decline of land prices in Tier II and Tier Ill cities will be very minimal as most of the land is either ancestral land or family holdings. Further, any reduction in land prices may have downward pressure on prices only for the new launches.
H. The Black money component in the Real estate has helped in reducing the cost to the buyer due to savings in taxes which were passed on the customers. The real estate market has perfect competition and is plagued by a tremendous oversupply of finished stock. All savings are passed on to the customers. Now with full Bank payment, there will be additional cost by way of taxes which will increase the cost and price rather than decrease.
I. The primary market i.e. sale by Builders in most cases is almost in cheque whereas in secondary market i.e. resale there is a big component of cash. The resale market may take a hit due to demonetization which will boost the sale in the primary market.
J. GDP will see an upward growth in the medium to long term as the Government will have more money to spend on developmental projects.
K. RERA will help about bringing transparency and investors confidence back in the real estate sector. The flow of both domestic and Foreign funds as well PE investors will boost the demand.
Positives of Demonetisation:
a. Increased liquidity with Bank due to increase in Deposits.
b. Increase collection of Taxes both direct and indirect.
c. Reduction in Central government Fiscal deficit.
d. Lower cost of funds to the banks will put downward pressure on MCLR leading to lower interest rates on lending. Housing Loan interest rates will come down from 9.25% to below 8%. The 10 Year Govt. Bond yield is already down by 50 basis points at 6.4%. Rate cuts by RBI will further bring down the interest to the apartment purchasers by reducing their EMI outflows.
e. Initially, the GDP will be negatively affected in the short term due to the non-availability of new currency notes and the shut down of parallel economy. But in the medium to long term increased credit lending due to increased liquidity that too at a lower rate of interest will revive economic growth and GDP.
f. An increased outlay of Funds for priority sectors as Government will have more funds.
g. Increased funding into Infrastructure Developments as money collected by way of taxes and possibly a huge dividend from RBI in the hands of Government.
h. GST will be a game changer once implemented i.e. by end of next calendar year further boosting the GDP. There is a hope that more money will enter the formal economy and that it translates into double-digit growth along with the implementation of GST.
i. The Budget for 2017-18 will surely have a fiscal stimulus for the housing and real estate sector if the Prime Ministers dream of Housing for all by 2022 has to be met.
Mangaluru being a Tier II city and one of the Smart City’s will have improved fundamental supportive of real estate prices. The public at large should differentiate that there can be a larger fall in Tier I cities real estate sector, Tier II cities have hardly any room for further decline. The best way to invest is to buy low and sit tight. This is the right time when the customers should go for bargain hunting and buy the apartments of their choice from a CREDAI member Builder. All the bad news are out and once the good news starts corning in, the real estate price will see an upward move. With fewer new project launches, the demand-supply situation will change very fast. Within a year 3 years of ready stock will look like 18 months stock with lower new supply and increased offtake.
Secretary of CREDAI Naveen Cardoza, S M Arshad, Felix Albuquerque, Sudeesh Karunakaran and other members were also present.