Evening of November 8th, when Prime Minister Narendra Modi addressed the nation on television, it was a historic and special evening for India, with his master stroke move that reflected "Swachh Bharat" was not just limited to cities but the whole economy. This Tuesday was a historic day in the Indian and 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, the United States voted for their 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 into some immediate inconvenience but over the next 2-3 months it shall bring in structural reforms, hence improving money circulation and improving tax compliance. The move is welcomed by the organized developer community and specifically a large and reputed player like the Brigade Group.
The perception that unaccounted money is parked in gold and real estate across the country is something many quarters of intellectuals firmly believe in. Parking of unaccounted money in the asset classes like land, gold and other precious commodities is something common and most tax advisors blatantly propagate. Many reports in the media stated that real estate and gold will be the worst affected asset classes in the days to come. It therefore becomes important to analyse this in detail to understand the implications and not generalize.
In cities like Bangalore, Chennai, Hyderabad, Pune and Gurgaon, majority of apartment buyers are salaried class and over 2/3rd of them avail mortgage to buy a home. Let me further break it up for you, the buying happens in the ticket size of Rs.50 Lacs to Rs.2 Crores by these professionals, who avail bank loans to fund their transaction. If we further analyse this in detail, cities like Bangalore, Hyderabad, Chennai and Mysore have over 90% of professionals, who work in the services or manufacturing sectors and are 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 stand true in the Rs.50 Lacs to Rs.2 Crores home segment in cities like Bangalore, Chennai and Hyderabad especially among the organized and reputed developers.
In the luxury segment (i.e Rs. 2 Crores and above) the homebuyer mix is a little different in most cities. Professionals or salaried class represent approximately 60% in cities like Bangalore, Hyderabad and Chennai and the remaining 40% are non-salaried class. The unorganized players in this segment will have an immediate impact and with no circulation of unaccounted money, we are likely to see prices softening by these unorganized players. The reputed and listed players especially in South India may not see the impact as they have never accepted cash.
Many pundits feel that land transactions will be severely impacted with this bold move by the government. Way back in 1995, 2001 and 2008, the industry witnessed slowdown on demand, but transactions or prices did not soften. Large and marquee land in metros is already a scarcity and land sellers normally do not 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 in real estate specifically in Bangalore, Chennai and Hyderabad?
In all these cities, there are pockets like CBD areas or areas where the trader community is active. Most of the deals in these areas (eg. Gandhinagar in Bangalore, Abids in Hyderabad and Chetpet in Chennai) have significant portion of unaccounted money being transacted for real estate and will be severely impacted with the recent move of government. Smaller developers active in these cities who 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 and Mumbai, there is limited activity by investors in cities like Bangalore, Chennai and 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 and Kolkata. Re-sale prices softening in cities like Bangalore, Chennai and Hyderabad is highly unlikely.
What about plotted developments?
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 and 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.
In a nutshell...
Organized players like Brigade will immensely benefit by increasing the market share in cities like Bangalore, Mysore, Hyderabad and 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 and 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 the tech and start up growth corridors of India i.e. Bangalore, Hyderabad and 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.
Om Ahuja | MRICS
Chief Executive Officer – Residential
Brigade Enterprises Limited
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