Real(i)ty Beyond Perception
Well, after letting all the demons out of the hat, it’s time to understand the impact in long term. This is the time when “Amrit” comes out of the “Samundra Manthan” and rejuvenates everyone. Let us understand the various aspects and impact of demonetization process in long term on Real Estate Sector.
Reduced Cash in the System: It is for sure that RBI will not infuse cash in remonetisation process equivalent to what was withdrawn during demonetization. Government is not comfortable with the idea of 12-13% cash to GDP and would like to restrict the cash to GDP below 10%. Such high reduction in cash holdings will lead to more digitized and banking channel transactions. Organised Real Estate sector will reap huge benefits if cash transactions go down and unorganized players find it difficult to thrive and undercut the organised market. Sales of organised development companies will stabilize over the period and will see spurt in long term. This demonetization process will also have a sobering effect on the land prices resulting in lower cost for housing and commercial development.
Surge in CASA Deposits and Downfall in Interest Rate: Demonetization process has brought in unprecedented CASA deposits in the banking system. The level of deposits which came in during demonetization is an event which has not happen since independence. Such surge in deposits had decreased MCLR of every bank and home loan rates have crashed to a decade low of 8.35 % as against prevailing rates of 9.5-10%. Such downfall in rates will spur demand in long term and will provide the required relief to the sector. Also with the government intervening with 3 Interest subsidy schemes which were by product of demonetization goodies, demand is sure to pick up and may even surpass the pre-8th Nov 2016 level with huge margin.
Transparent and Stable System: Steroids always give immediate results but in long term they are very harmful for the body. Same goes with cash too. Though it gives immediate flip to the demand in the sector but thriving on illicit and black money is not good for the future. With cleaner financial system and reduced cash flows in the market, more and more people will move towards transparency and organised development. Opaque dealings, illicit money and cash driven sales are not good for real estate sector and after demonetization, many of these matters will become history and new era of transparency will usher in the sector.
Lower rates of taxation in future: Demonetization will bring huge windfall of revenue for government, and many more new people will come in the tax net. This will lead to fall in tax rates and change of tax slabs thus benefitting crores of tax payer and putting more money in their pocket for expenses. Also, government has already announced a huge package for buyer and developers during budget 2017 to reduce the pain in the sector. Lower Direct taxes coupled with GST will be big boon for the real estate sector.
Reduced Competition and Raised bar for Entry: One thing which is bound to happen is decreased competition in sector. With many of companies finding it difficult to survive without cash money, they will go out of the market. Companies which act transparently, with support of bank funding and pay proper taxes will only survive this rude shock and will be there in future to reap the benefits of this demonetization process. Reduced competition will give the pricing power back to the developers thus resulting in more stable profits and margins.
Increased Funding: Any sector which is transparent and law abiding, always attract lots of funding including FDI. Over the period with demonetization, RERA and GST transparency in real estate sector will reach to levels never seen before. The sector which is considered as core and is the most important component of any developed economy is bound to attract huge funding from various sources like Banks, FDI, Insurance companies, Realty Funds, Sovereign Funds, PE Funds, REIT’s, etc. With ample funding, available on easier terms, real estate sector will again become top performing and wealth creating sector of our economy.
Digitization of economy and improvement in banking habits: The digitization of overall economy which was expected to be achieved in next 10 years will happen in next one year, thus fast pacing overall digitization and payments through banking channels or other recognized and traceable channels like e wallets. Citizens income which escaped taxation earlier will come on official records and leveraging capacity will increase tremendously. We should understand and realize one thing that when one Indian escapes tax or evades tax, he increases the burden of tax on honest taxpayer. As honest tax payer, we should not allow anyone to evade taxation, no matter what happens.
This Article is Opinion/Point of view of the writer on the demonetization process and its after effects on real estate sector. Views mentioned above may or may not hold true in the future.
CFO, Dhanuka Realty Limited
Dhanuka Realty Limited is the First Real Estate company of Rajasthan to be listed on NSE Emerge.