Wednesday, November 23, 2016

Surgical Strike on Currency & Real Estate Future!

“Money is the worst currency that ever grew among mankind. This sacks cities, this drives men from their homes, and this teaches and corrupts the worthiest minds to turn base deeds”… Sophocles

Sophocles is one of three ancient Greek tragedians whose plays have survived. His first plays were written later than those of Aeschylus, and earlier than or contemporary with those of Euripides & was a great economist also! I think 8th Nov 16 is a day which will be long remembered in minds of most Indians for the so called historic demonetization (I hope I spelled it right) or in simple words banning on Rs 500 & Ra 1000 currency notes by our Hon PM! Long back when I was a kid, a film named Sholay got released & it created a history too! Such was the popularity of Sholay that its said there are only two categories of Indians, one who has seen Sholay & other who hasn’t! Same way at present there are only two types of Indians, one who are less affected by demonetization of notes & other who has more affected & there will be very less in later category, like those who hasn’t seen Sholay! Some way or other everyone is affected by currency ban i.e. either because of having banned notes in excess or not having anything, both categories has suffered! Going a step ahead, I am sure here after there will be same terminology like “before AD after AD”, getting replaced by the term “before Demonetization & after Demonetization”! At the same time this must be the most talked incidence of post independence as last fifteen days right from social media to print or electronic media, demonetization & it’s after effects is the only topic! My whats-app hasn’t stop buzzing about the jokes which features both sides of the currency ban! Opposition Political parties also taking this issue like threat to entire Indian economy & firing from ruling as well opposition parties is on ever since!

Well is the decision of Hon PM right or wrong, that time will decide as nobody is arguing about the intentions but the way it’s being executed along with success of pulling black money out, is being doubted for sure! But then this is Indian Democracy at its best as here everyone has his or her say on everything & this is something where right from the street beggar to a billionaire, all are affected for their own reasons! Though the target of demonetization was, one to eradicate fake currency which was in mainly in the form of  1000/- & 500/- rupee notes & second is give some air to billions of dead stock of above notes in form of what is popularly known as black money! As now the only way to get rid of these notes is to make them to banks that too nationalized banks only! I repeat I am no financial wizard, not even self proclaimed money expert but as a businessman & engineer by myself felt like sharing my views regarding impact of this on real estate, which is my field! And since last days many wrong messages are being circulated regarding real estate which made me pen down my logic!

Ever since the announcement of banning currency the social media is full of all sorts of messages many claiming that right from gold to petrol to homes i.e. real estate prices will fall drastically! I don’t know about gold or petrol but let’s see what effect real estate will have due to banning of present currency notes! For that first of all lets understand the role of these notes in real estate as unless we analyze that part we won’t be able to understand the effect too! Let me make a bold statement here, of late there was no role left that of  the so called high value notes in finish product of real estate which is a flat may it be 3/2 or 1 bhk in common language! Many won’t agree but as a developer in Pune who has seen the spectrum for last 25 years I am making this statement with full responsibility. And not just finish product i.e. homes but the cash transactions are out of real estate industry right from material purchasing to labor payments, nobody wants to touch the cash is fact. At the same time this is buyers market & buyers are mostly salaried class who don’t have access to cash, here cash means black money is what I meant! Rather more & more people are buying their homes with help of home loans so they can’t afford to pay the cash & devalue their home as it means less loan amount! May be a decade back scene was different as that time loan amount was less than sixty percent of flat value so  people used to pay they part in terms of cash & even developers were also happy in accepting cash but no more it works today! This means black money is out from real estate already when its making or selling the finished product, so where is cash in real estate?

Answer is simple, it’s in land! One look at ready reckoner values of lands around & actual market rate of the same will reveal the facts. And you can’t blame builders for cash in land deals as it’s the landlords who control land prices & mode of payment! Let’s remember a builder is responsible for flat prices & its mode of payment but he has no role in land purchase & in our country everyone has right to decide how he or she has to sale their own land, no govt can force them to sale at some fixed rate! The landlord’s reasons may be many, right from mode of acquiring the said land to avoid the heavy property gain tax to family distribution of payment type issues; many aspects are involved for existence of cash in land deals. Now the only way left for the builder is either fulfill this demand of landlord & pay him cash or leave the land deal. Because even you agree to pay the cash part how to generate is one issue & then the profit figures sour up due to this hidden land cost as income is in full check! Outcome is many sane builders are opting out of such land deals where cash is demanded by the landlords than entering in rat race of acquiring land at any cost. So where this cash comes in land is what one will ask; answer even a school going kid in this country knows, this is black money outlet & the cash holders too are known, surely not the professional developers!

Another aspect where cash or black money is involved in not only real estate but any business in our country is corruption, as you can’t ask money in check for sanctioning a file or giving some noc! And real estate has got hundreds of such opportunities for the system, so here is where cash enters in real estate but this again I will dare to say is just small part in comparison to entire turnover of real estate! And again most of this kind of money generated comes back in land only, so in a way real estate has always helped to recycle the cash, funny it may sound but a fact!
Now after knowing the role of cash or say black money in real estate logically tell me how banning of few notes is going to reduce home prices? As you haven’t reduced gain tax; neither the sanctioning procedure has been made transparent nor the number of noc’s have been reduced, so from where the cost of all these will be curtailed which in turn will reduce land prices which is raw material for the real estate? One sure thing everyone is agreeing is banning of notes is not going to reduce the corruption then how we are going to assure no entry of cash in real estate, is what I will like to ask. Rather I suspect more cash whatever will be generated in all over the country will flow in to real estate in land buying as with currency notes has no surety & expected restrictions on gold buying, land remains the only open & safe field for all the black money & this will rather increase rates of land whatsoever available!

After reading this one might think what else can be expected by a developer, always speculative about their product; but if we really want to have homes to be available at reduced rates, just banning some currency can’t be the way, let’s accept it! All those who are still thinking I am speaking like a builder & still feel that property prices will come down by currency banning, answer my simple question; why no one is saying that rates of steel or cement or tiles will be reduced by this move of the govt? Or even why nobody is claiming lap-tops or cell phones will become cheaper by banning these notes? Simple because people feel that so called black money or cash isn’t involved in making of above products & that’s why nobody makes claims about effect of prices of these items! But at the same time nobody can’t assure about stoppage on generation of black money in future & entry of this cash in land deals, so the only way to make homes cheaper is make more raw material available at cheaper rate to the real estate! And you need not to be a great finance master for that as in any industry its making raw material available at cheaper rate along with infrastructure & finance to that industry is the way to make its end product cheaper; and real estate too isn’t exception to this logic!  Means we need to make more & more land available for housing & that too land with proper infrastructure like roads, water, drainage etc which will make people’s life easy by living in the homes build on those lands! At present every essential ingredients required for making a home is available in ample thought there too is high need for controlling rates of basic material like cement & steel & most importantly the land. At the same time streamlining the procedures involved in clearing the land proposals & having a uniform & consistent policy for real estate is must. Because the interest burden created due to time lag in making a home is also a major aspect which the end user only has to carry making homes costly! 

We can use the huge fund flow which is now available to the banks to finance the housing projects at lower interest rate, at the same time make entire sanction process involved in real estate online i.e. without any human interference, that’s the key to reduction of home prices! Or else like the famous mythological story of demon Bhasmasur, this move may make homes go further beyond the reach of real needy ones as let’s not forget that we need a piece of land to build any home & there won’t be left any such piece of land while we just demonetize some currency & keeping ways of black money generation open!


Sanjay Deshpande 

Sanjeevani Dev.

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