The central government has recently announced the withdrawal of Rs 500 and Rs 1,000 currency notes and appealed to the citizens to exchange the same with new currency notes. The aim of this initiative is to flush out black money as well as fake currency from the Indian economy and encourage citizens to get used to electronic transactions.
Real estate is one of the sectors that are expected to be the most affected, as the industry is unstructured and cash plays a vital role in every aspect of the industry.
Commercial real estate will see minimum impact on office/industrial leasing, given that cash components do not play a significant role in such transactions. Site operations and daily wage workers will be the victims of demonetization the industry has come to a stop since these involve daily wage workers. Due to withdrawal limits and the crunch in the cash flow, the developersare unable to withdraw desired cash from their accounts to keep the sites running.
The obstacles have increased immensely for public servants in positions of authority as the real estate is well known to stash cash and creation of fictitious land rates. When it comes to approvals, real estate witnesses major corruption through large cash transactions made for acquiring clearances.
The industry has been a victim of corruption, where even if a developer wants to transact legally, government and municipality approvals force him to use cash to get timely approvals and clearances. The currency demonetisation may temporarily liberate the industry from corruption and help regulate the prices of properties that had inflated way too much.
Residential real estate in urban belts is driven by home loans and the service class people who have already disclosed their incomes tend to deal with white money while buying properties. However, in tier II and tier III belts, transactions for residential housing are are a mix of black and white funds. The greatest reason for real estate to be affected is the fact that the industry is used by black money hoarders to park their funds. With this move, it is expected that land rates will come down and illegitimate cash transactions will be curbed.
Demonetization will have futuristic benefits for customers and will also help make projects better structured since GST and RERA will also be applicable soon.