On November 8th, the government announced demonetisation of Rs 500 and Rs 1,000 notes that has had already had a serious impact on the real estate sector. 

Where do we see the real estate market? What will be the impact of demonetisation on property prices?

Traditionally, the preponderance of ‘black’ or unaccounted for monies in real estate – largely by way of cash transactions is seen in the following places:

• Secondary or resale market transactions
• Supply chains related to primary markets – viz. land, material, labour etc.

At first glance, it would seem that only secondary markets (resale) would be affected since all of their transactions are generally understood to be bank-worthy, i.e. in white, accountable currency.

Secondary markets would be affected as unaccounted cash payments would no longer take place, leading to some dips in sale process for assets that are sold or purchased in the short term.

However, with progress of time, it will not be surprising to see prices go up as sellers come to terms with the fact that capital gains tax has to be paid on monies, Sellers will factor that liability into the sale price.

A closer look at the primary market would indicate that there are several components of informality within the production chain – such as purchase of land for onward development of a project.

Earlier, a landowner could enter into an agreement with a developer where part of the consideration paid would be unaccounted. Now, since the landowner can no longer do that – he would either sit out on the land, stalling the entire development project, or charge a higher premium to maintain the same cash margins after tax. The same principle also works between developers, contractors and sub-contractors. All of this included, the input costs of developers will go up, and the only way they can respond will be by raising prices – which will affect a market already strained.

There is also the all-important and all-encompassing issue of corruption. It is no secret that the myriad set of approvals required for a real estate project comes for a price, or often, price(s). Again, since this is not likely to disappear anytime soon, developers will have little option but to enhance property prices to cover for costs of additional tax liabilities.