Money oils the wheels of commerce.

Since the 1970s, high denomination notes of Rs. 500 and Rs. 1000 had become the usual legal tender in India: inflation had virtually made the lower denomination notes “loose change”! The Reserve Bank of India Annual Report 2015-16, noted that as at end-March 2016, these notes together accounted for 86.4% of the total value of banknotes in circulation[1].

Historically, India has been a high-tax jurisdiction, weighted down by the “license-and-tax” raj (an elaborate system of regulations and licences, discretionary permissions and consents, promoting crony capitalism and red tape). India continues to be ranked high in corruption[2], and relatively low in competition[3]. It is widely perceived that citizens resorted to their own means to counter this system: under-and-over invoicing deals, incurring fictitious expenses, relying on money laundering and hawala schemes (informal money transfer schemes outside formal financial channels). Tax-evaded monies began to be stored in non-Rupee form, and it is alleged that the two biggest beneficiaries were gold and real estate, with the residue parked in foreign currencies. Counterfeit and fake currency, with cross-border connotations, added to the pain.

Especially in the real estate sector, news reports abounded about builders paying bribes to obtain approvals to commence, continue and complete construction; unaccounted cash being paid to buy agricultural lands; speed money paid to update land records; builders demanding “top-up” monies from flat and office buyers, and rooms-full of Rs. 500 and Rs. 1000 notes found in search and seizure raids[4]. All this has given a bad reputation to the real estate sector. Such reports, coupled with some builders acting as if “they were beyond the law” (by including absurd clauses in sale documents, causing unjustifiable delays in completing projects, and delivering poor construction quality) primed the climate for regulating “unaccounted money” in real estate. The recently enacted Real Estate (Regulation and Development) Act 2016 (RERA), and the recently amended Benami Transactions (Prohibition) Amendment Act, 2016,[5] are steps in this direction. The introduction of a national Goods and Service Tax (GST) in India from April 2017 will also add a fillip.

The Indian government has since banned Rs. 500 and Rs. 1000 denomination notes from midnight November 8, 2016.

With this background, what will demonetisation mean for the real estate sector in the next few years? We venture some thoughts below.

  1. The sector will present unparalled opportunities, for genuine builders/promoters who are fair in their dealings, to buy and develop land, sell completed projects, and receive the agreed purchase price through formal financial channels. Listed, well governed, and experienced developers will rule the roost. Fly-by-night operators (a bullion trader becoming a developer because the gold market is in doldrums, for example) will suffer. Every market player will have to clean up his or her act.
  2. Demonetisation, together with the 70% escrow provisions under RERA (as discussed in our post on November 22, 2016), will likely reduce liquidity. This will curb spending by those buyers who are looking to move in and out of deals to make a fast buck. A decreasing interest rate regime may mean cheaper loans, but will also reduce earnings from fixed-income assets. In short, cheaper home loans may not necessarily translate into increased sales, and actual users will maintain a wait-and-watch approach, buying only when they need to. Sale of commercial units may remain healthy, since acquisition cost is a deductible expense (as depreciation).
  3. Delivery of on-going projects is likely to be affected: often, payments to contractors and labour are in cash, and formal alternatives will take time to take-off. Developers will advertise low down-payment models to sell their stock of flats and offer concessions and freebies, but buyers may prefer closing deals only against an occupation certificate and simultaneous possession.
  4. Secondary transactions (i.e. re-sales) will reduce in the short term (as these were more cash intensive). Again, buyers may adopt a wait-and-see approach, closing only when in dire need.
  5. Rental, leasing, and licensing transactions will increase. A ready-to-use home/office, with unambiguous approvals to use, zero concerns about capex/property taxes, and an option to move out to a better alternative, presents clear advantages. Stamp duty and other costs for such transactions are low. Regulator interaction for the user also remains minimal.
  6. Despite 1 to 5 above, every Indian loves to own a home/office. It is priority asset no. 1, an unequivocal security, an undefeatable tangible asset. In the medium to long term, demonetisation may turn out to be a blessing in disguise for the real estate sector ensuring transparency, good governance, and well maintained buildings.
  7. Intermediaries like land aggregators, unregulated brokers, and land mafias will have a tough time.
  8. Real Estate Investment Trusts, investment by institutional investors and private equity players, and lending against property will develop into robust financing alternatives.
  9. To ensure that a sector which contributes 5-7% of the country’s GDP remains robust, governments will continue to focus on housing for all, reducing stamp duties, rationalising taxes, penalising benami deals, automating titling and land registration, and promoting title insurance.
  10. Most importantly, with RERA and advancing technology, the realty sector will become increasingly transparent, well-regulated, market facing and stable. States with market facing laws and practices will compete with each other to attract investments.
  11. Lastly, we do not opine on whether property prices will rise or fall due to demonetisation in the short/long term. Prices are a function of supply and demand, and statistics show that there has always remained a healthy demand for land, homes, offices, holiday bungalows, and infrastructure.
  12. After all, “the greatest investment on earth is ….. Earth.”

[1] The Reserve Bank of India Annual Report 2015-2016.

[2] Transparency International (Corruption Perceptions Index 2015)

[3] The Global Competitiveness Report 2016-17

[4] Adarsh Scam (; Bribes (

[5]  This enactment allows the government to confiscate properties or assets held in fictitious names to evade tax and hide unaccounted wealth.