Turning Point in Real Estate !
- Mr.Om Ahuja
India 10 November 2016: Evening of Nov 8th, when the Prime Minister Modi addressed the nation on television, it was historic and a special evening for India with his master stroke move that reflected “Swach Bharat” was not just limited to cities but the whole economy. This Tuesday was a historic day in the Indian & global history. Central Government made a BIG BOLD move of banning Rs.500 & Rs.1000 currency notes, an important step towards destabilising parallel economy (i.e. black money). On the same day, US voted for the new president and basis the early indications, global markets have weakened that has led to Indian indices seeing dramatic drop and now recovering.
This bold move will completely destabilize the parallel economy and specifically cleanse the system. Counterfeit currency and terror funding aspects will also be addressed by this great move. It will put the common man with some immediate inconvenience but over the next 2-3 months it will bring in structural reforms improving money circulation and improving tax compliance. The move is welcomed by the organized developer community and specifically large and reputed player like Brigade.
Perception that unaccounted money is parked in gold & real estate across the country is something many quarters of intellectuals firmly believe. Parking of unaccounted money in the asset classes like land, gold & other precious commodities is something common and most tax advisors blatantly propagate. Many reports in the media stated that real estate & gold will be worst affected asset class in the days to come. It becomes important to analyse this more in detail to understand the implications and not generalize.
In cities like Bangalore, Chennai, Hyderabad, Pune & Gurgaon, majority of apartment buyers are salaried class and over 2/3rd of them avail mortgage to buy home. Let me further break it up for you, the buying happens in the ticket size of Rs.50 Lacs to Rs. 2 Crs by these professionals, who avail bank loan to fund the transaction. If we further analyse this in detail, cities like Bangalore, Hyderabad, Chennai & Mysore have over 90% of professionals, who work with services sector or manufacturing sector and fully dependent on their salary earnings to fund their EMIs. The demonetization of large currency, will have no impact on these home buyers and there was no room for unaccounted money in circulation either earlier or in the future. Many unorganized players who were dependent on such cash transactions will face the slump in demand from the non-salaried home buyers. Expectation that there will be slump in demand or room for correction doesn’t stands true in the Rs.50 Lacs to Rs.2 Crs home segment in cities like Bangalore, Chennai & Hyderabad among the organized and reputed developers.
In the luxury segment (i.e Rs. 2 crs and above)in most of the cities, homes are transacted by a good mix of home buyers. Professionals or salaried class represent approx. 60% in cities like Bangalore, Hyderabad & Chennai and balance 40% are non-salaried class. The unorganized players in this segment will have immediate impact with no circulation of unaccounted money and prices softening by these unorganized players. The reputed & listed players may not see the impact as they never accepted cash in markets like Bangalore, Hyderabad & Chennai.
Many pundits feel that land transactions will be severely impacted with this bold move by the government. Way back in 1995, 2001 & 2008, the industry witnessed slowdown on demand, but transactions or prices never softened. Large and marquee land in cities like Bangalore, Chennai & Hyderabad is already a scarcity and land sellers normally don’t panic in such situations to drop the prices. Some pockets where there is excess supply of land may witness a slowdown and softening of prices. This will only benefit the homebuyer in medium to long term.
Will this mean that there is limited impact on real estate specifically in Bangalore, Chennai & Hyderabad? In all these cities, there are pockets like CBD area or areas where trader community are active. Most of the deals in these areas (eg. Gandhinagar in Bangalore, Abids in Hyderabad & Chetpet in Chennai) have significant portion of unaccounted money being transacted for real estate. At times the percentage is as high as 50% and such transactions will be severely impacted with the recent move of the government. Smaller developers active in CBD areas or these cities were catering to significant non-salaried employees will have serious impact going forward with this bold move.
We keep reading that there will be significant impact on re-sale deals, is this true? Unlike NCR & Mumbai, there is limited activity by investors in cities like Bangalore, Chennai & Hyderabad. The percentage of end-users in these cities is over 70% and balance 30% are buyers from tier II cities or NRIs, who are not speculators. Expectation of panic selling by investors or re-sale market softening will be true in cities like NCR, Mumbai, Pune & Kolkata. Re-sale prices softening in cities like Bangalore, Chennai & Hyderabad is highly unlikely.
Plotted development will be severely impacted and expectation of correction stands true in this segment. This segment has majority of buyers as speculators and parking of unaccounted money. This segment across cities in India will be the worst affected and will take a long time to bounce back. In tier II cities like Hubli, Belgaum, Coimbatore & Kochi the impact on overall transactions will be higher with this move as the demand is already slackening for the past few years and we may see further challenges.
Organized players will immensely benefit by increasing the market share in cities like Bangalore, Mysore, Hyderabad & Chennai. In the coming months, we expect RERA implementation to further trigger consolidation in the industry. With money circulation improving in the coming months, citizens who were not in the tax ambit will come out and boost the country’s Tax to GDP ratio significantly. This move will only help the economy and organized players to capture the larger base which was earlier investing in land or plotted developments.
Transparency & confidence in the real estate industry is going to dramatically improve in the coming months and we expect large foreign institutional players increasing their stakes in India and specifically investing in growth corridors of India i.e. Bangalore, Hyderabad & Chennai, where the demand for housing is robust and fundamentally firm. Many new initiatives of the government like RERA, Benami Act, GST will make large organized players participate in the Government vision of “Housing for All” by 2022.
(The author is CEO - Residential Brigade Group)