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DeMo effect: Realty shaken, but holding ground

Author: Rajyashree Guha/Wednesday, November 8, 2017/Categories: Economy

DeMo effect: Realty shaken, but holding ground

Not all was good with the realty sector when Prime Minister Narendra Modi went live on television on November 8, 2016 and announced that Rs 500 and Rs 1,000 were no longer legal tender. Till then, only the circle rate decided by the state government was paid through banks while the rest were all cash transactions. The circle rate was only 30% of the real value of the property. In land dealings, the amount of cash transactions could go up 30% to 50% of the market value.

Yet, the sector had withstood the test of time and was slowly recovering from the impact of the global economic downturn in 2008 which had dealt an ugly blow to housing demand. In 2009-10, the retreat of various real estate investors, accompanied by the slowdown in the capital market had resulted in oversupply and falling of prices, revealed a report by Crisil.

In November 2016, yet another challenge hit the industry.

“There was a lot of confusion among buyers on the impact of demonetisation in the first few months, rising mostly from rumours that the government would keep track of every individual’s property dealings. This resulted in decisions being deferred for some time,” said K.V. Rajnarayan, senior general manager of Ramky Estates and Farms. This majorly impacted the primary market of the real estate sector where most of the dealings are done through bank or other financial institutions.

“What took a hard hit after demonetisation was the land plotting ventures and the secondary market,” he said.

Unlike the primary market, where the dealing is between the buyer and the construction firm, the secondary market involves deals among a buyer and a seller.

“The cash component is high in the secondary market due to high registration charges. In an all-cash transaction you could save stamp duty and registration charges. Also, it helps in cheating capital gains tax. Suppose the property is valued at Rs 3 lakh circle rate and is sold at Rs 5 lakh, the Rs 2 lakh difference is paid in cash and will not attract any capital gains tax,” said Gummi Ram Reddy, president of Confederation of Real Estate Developers’ Associations of India (Credai), Hyderabad Chapter. “To deal with this challenge the state government must bring down registration charges,” he added.

Moving past the initial crunch caused by demonetisation, realty experts believe the government’s stern steps will benefit authentic buyers and sellers in the long run. “Genuine builders hardly accepted cash and therefore were not so badly impacted by demonetisation. This move will consolidate the sector even further,” Rajnarayan said.

The focus has now shifted from speculators to real home buyers. Apart from this, the government has taken a slew of measures to boost the real estate sector including introduction of the Real Estate Regulatory Act, Benami Transactions Act, Goods and Services Tax and liberalisation of foreign direct investment.

Demonetisation and other reforms in realty have led to the consolidation and institutionalisation of one of the biggest sectors in the country. “The housing sector alone contribute 5-6% to the country’s gross domestic product (GDP), which will grow to 13% by 2028,” according to India Brand Equity Foundation. With the Securities and Exchange Board of India approving the Real Estate Investment Trust (REIT), the future seems to be strong for the realty sector.

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