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Demonetisation, RERA impact: Circle rates, property value may see rise a year from now

The past year has been anything but boring. While the world was focused on the 2016 Presidential elections in the United States, one of the boldest reforms was witnessed in India.

Govind Sankaranarayanan   New Delhi     Last Updated: November 21, 2017  | 13:20 IST
Demonetisation, RERA impact: Circle rates, property value may see rise a year from now

The past year has been anything but boring. While the world was focused on the 2016 Presidential elections in the United States, one of the boldest reforms was witnessed in India. The 8th of November marked a revolutionary step to tackle the issue of untaxed liquid money in the form of demonetisation.

Pre-demonetisation, the real estate sector was already in the doldrums, grappling with legacy issues like inflated property prices which resulted in a supply glut. While the government's "Housing for All" policy did bring in some positivity, the uncertainty around the sector couldn't be avoided.

The immediate impact of demonetisation was to reduce the secondary transactions in the Real Estate Sector, which have seen a greater component of cash payments.  Most Housing Finance Companies reported 20-25% decline in disbursal during the November - February period.

Subsequent to March, there has been a tepid recovery in the interest in the Real Estate Sector, although the implementation of RERA in July created a blip of uncertainty.  Builders needed to be registered to sell new units and sales across the country fell until these registrations were completed.  The RERA rules also placed constraints on when builders could be funded by lenders and how much they could use in each project - limiting the previous habit of launching many projects in parallel. Therefore new project starts are much lower than they would otherwise be.

An unintended impact of demonetisation and GST has been some growth in the Loan Against Property (LAP) business.  Businessmen who might be facing short term cash constraints on account of both these events are pledging their property and raising money against it to tide over short term working capital gaps.

The demonetisation combined with the Government's restriction on cash transactions above Rs. 2 lakhs and its assertive approach towards tax collections would inevitably result in some change in behaviour.  For Real Estate this means a higher number of transaction will now be made through the formal banking system. Over a period of eighteen months we should start seeing slightly higher circle rates and higher registration values for property, which would then be one form of evidence that the cash component in sales is reducing.

The discipline of RERA combined with the other initiatives of the Government will separate the men from the boys- ensuring that the Real Estate Sector has fewer but more organized players and that, in the long run, properties will be more affordable than was the case in the past. What we need are not a handful of homes that cost above Rs. 3 Crores but 25 million dwellings, which cost less than Rs. 30 Lakhs.  This scale can be achieved only by organized players within the formal banking system and with reasonable Real Estate prices.  To the extent these Government policies have achieved this goal that must be seen as strongly positive impact.

The writer is Chief Operating Officer (Retail Business & Housing Finance), Tata Capital.

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