Withdrawal of big notes to likely to bring down real estate prices

The sudden withdrawal of Rs 500 and Rs 1,000 notes is likely to hurt the real estate market, which is already reeling under crisis in Indian cities. The builders who are already hassled by the slowdown rued that it will make the situation worse. On the other hand there are indications that realty prices may reduce.

The invalidation of old currency notes will directly impact the secondary market transactions where 60:40 - the ratio of legal to black money - had become a norm of sorts. The primary market, where one buys a house in a project directly from a developer, will not be directly impacted by the measure.

However, the market players feel that the impact on the secondary market is set to hit the overall sentiment, which has remained subdued for the past few years.

"The effects of the currency measure will be far reaching and immediate, and will shake up the sector in no uncertain way," said chairman and country head of JLL India, Anuj Puri.

President of the Confederation of Real Estate Developers' Associations (Credai) Getambar Anand, however, argued that most of the houses in the primary market are sold on bank finance.

"Therefore, the black money element will not have any impact. As the values of units are publicly known, they cannot sell other units at a discounted price in white and the rest on cash payment," the head of the industry lobby group said.

But given the widespread use of cash when it comes to payments to local authorities and politicians in office, a lot of the transactions by developers are conducted in cash, some of which "managing" their own books.

As PM Narendra Modi said, real estate and land purchases are seen as one of the most prominent segments of the cash economy.

In most developed areas in metro cities, the initial transaction is through legal channels. But when it comes to a resale or a secondary market transaction, the seller often seeks cash payment to save on capital gains tax. For the buy er, the attraction of cash deals is that they can report a lower value to the registration office and reduce the stamp duty burden. In addition, this is an outlet of cash lying idle with buyers which cannot be parked in the banking or financial sectors to reap returns.

Because of black money, the value of real estate in many markets in metros have appreciated sharply. After the PM's announcement, the expectation is that use of cash will nearly vanish, at least for the next few months, resulting in a sharp drop in prices in the secondary market. This will have an effect on the primary market as well.