Sunday, 4 December 2016

Property Investments After Demonetization: Pain or Gain?

While almost everyone in India continues to be affected by the short-term effects of demonetization, Investors have already started brainstorming and planning for the long-term steps which would reap out the maximum benefits. A groundbreaking policy like this is often an important milestone to re-craft the basic underlying fundamentals. So, it serves as an appropriate time for anyone with regards to property ownership, to evaluate their strategies again and rethink over their desired investment portfolio.

It is very likely that with the recent enormous influx of money in banks, the interest rates are bound to decrease which would lead to an increase in asset prices like real estate. But, there are a lot of differentiating factors related to the property investments since all the property markets and transactions are not the same. With the reduced interest rates and less amount of black money, the savvy investors would, in fact, profit from demonetization.

The new-economy urban centers of India which consist of mostly salaried people in white-collar jobs are least likely to see any considerable change in the real estate prices post demonetization. Estimated figures suggest that in Bangalore, only 5% of the transactions for apartments in the mid-range segment of the market involve cash dealings. This is in contrast to the traditional property markets in cities like Mumbai and Delhi or in the higher segment of properties (greater than 1 crore), where there are higher chances of transactions happening through cash. So, cities with a larger proportion of the new economy jobs would prove out to be more stable and attractive for the investors, especially in the mid-range segment. Bangalore tops the list of such cities, followed by Pune and Chennai, with salaried professionals and mortgage-based properties dominating the real estate market. In such cases, Investors can actually expect the demand to rise due to the reduced interest rates.

The case of land transactions is slightly different, there would be scenarios where the prices will rise and in some cases, it would fall. If we consider the vast parcels of land in and around commercial/urban cities, properties are mostly purchased by developers or individuals with really high net worth. For property buyers who primarily rely on institutional financing (like the reputable developers), demonetization is not likely to impact a lot while the other parties such as the individuals who used to be dependent more on cash, would have to temporarily wait and watch how the market advances. Thus, demonetization is going to benefit the large developers as compared to the smaller developers or individual investors. Similarly, the tier 2 or smaller cities where the proportion of purchasers with access to institutional financing is lesser, demonetization would decrease the property prices as all the purchasers likely to be affected to the same extent.

On the other hand, increased taxes and anchoring post demonetization will add up to the dynamic mix of factors affecting the real estate prices. The reduction in black money is directly proportional an increase in the tax rates as the "tax-free" portion of the transactions could diminish. And an increase in the tax rates would eventually lead to the higher property prices, especially in the markets not affected by demonetization, as sellers usually consider the profit after tax as their ROI.

Thus, the demonetization would create winners as well as losers in the real estate sector, which would depend on various factors like the property type, location, and the price points. It is in the best interest of investors to park their money in the mid-priced properties in the urban centres of India, which have the highest percentage of new economy buyers with white-collar jobs. While, properties in the tier 2 cities and more traditional urban centres, and assets with high prices, would not prove out to be a safe bet.

As demonetization has now become the new normal in India, property investors who would focus their investments towards the new-economy professionals, can expect to come out as the real gainers.

Written by Rohit Jha

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