Demonetisation to strengthen the real estate sector – CREDAI Hyderabad

Housing prices will remain stable

Hyderabad: 29th November, 2016: Confederation of Real Estate Developers Association of India (CREDAI) Hyderabad today announced that the real estate industry fully supports the decision of the government to demonetise currency notes. The Credai Hyderabad members welcomed the Union government’s decision to put the halt on black money.

Almost 95% of the Hyderabad market consists of mid segment housing, whose pricing ranges from Rs. 25 lakhs to Rs. one crore. The buyers in this segment are mostly employees, whose income ranges from Rs. 25,000 to Rs. 2 lakhs. They essentially pay the housing installments from their savings and the bank loans, they get from Banks. Therefore, there is hardly any cash component in their transactions with the developers. In the absence of cash component, the demonetisation has no effect on prices of residential housing or other housing. Similarly, over the years the Hyderabad real estate developers have been accessing the necessary capital from the Banks. Almost all the real estate developers, who are the members of CREDAI and who contribute 85% of the Hyderabad real estate market, undertake real estate development on the lands taken from the landowners under a joint development agreement. Therefore, there is no financial transaction between the developer and the landowner, much less the cash transaction. 

Demonetisation is likely to improve government tax collection by broadening the tax base and enabling them to take up development and infrastructure projects on a war footing and boost the growth of the economy. The government would also be in a position to fast track the initiatives such as AMRUT, Housing for All by 2022, Development of 100 Smart Cities etc. leading to significant job creation. This influx of money into the monetary system will also put more money into the pocket of home purchasers through lower tax burden and incentives for home ownership.

The Real Estate sector will witness a major change in 2017 with the introduction of RERA Bill in May 2017 and implementation of the GST regime in April 2017. In view of the several requirements of the RERA Act, the real estate developers will be constrained to take up smaller and limited number of real estate projects. In view of this change the supply of real estate products will come down, while the demand continues to increase in Hyderabad. The gap between demand and supply will increase and consequently the availability of housing units will be less. Therefore, the prices of housing units will increase, once the RERA comes into effect from May 2017 and consequently the prices will tend to increase. 

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The GST is likely to be introduced from April 2017. Presently the service tax paid on services and others are given a set off against the service tax payable by the developers/homebuyer. Thereby, there is less incidence of service tax on the cost of the housing unit. This facility will not be available once the GST regime comes into effect from April 2017. Consequently, there will be more incidence of service tax on the cost of the project. Further with the introduction of GST the rate service tax will be higher at 18%, compared to 5.5%, which is now applicable. Thus, the real estate prices will increase as a consequence of introduction of GST from April 2017.

According to Mr. S Ram Reddy, President, CREDAI Hyderabad, “We believe that the demonetisation is an initiative to cleanse the economy and make it growth focused. It will be good for the overall economy as the unaccounted cash transactions would also become a part of the mainline economy and provide government more tax inflows enabling them to take up mega infrastructure projects and steer the growth. The banking and financial system will also be plush with funds to provide credit to the industry at a lower rate of interest, thereby spurring the economic growth and creating more jobs. This will give a major impetus to the real estate sector, as more jobs and lower interest rates are likely to encourage end users to purchase their dream homes.”

He further added that, “Hyderabad real estate market is driven by the end user demand. The present prices for real estate in Hyderabad are the lowest amongst all the metros with no influence of any speculative operators. The funding by the home buyers is mainly through loans from banks and financial institutions which are all regulated entities. As such, cash deals are not a part of the real estate transactions by our members. All organized developers adhere to strict business principles and maintain complete transparency in the transactions. We have been sourcing funds from banks and Financial Institutions and have not been dealing in cash transactions over the last 5 to 6 years Therefore there will not be any impact on the real estate sector and the prices will remain stable. The much awaited RERA bill will come inforce from May 2017. The effect of RERA is going to be that there would be short supply of housing stock in the market and as a consequence of this shortage, the real estate prices will go up. Also, the effect of a GST coming into effect from April 2017 is that the prices would increase on account of non-availability of a service tax set off as well as increase in the rate of tax rate. So we are of the opinion that for Hyderabad, the demonetisation will have no impact on current real estate prices, but with the introduction of GST & RERA bill the prices will go up. So the home buyers in the city should not delay and purchase a property now.”

According to Mr. P Ramakrishna Rao, General Secretary, CREDAI Hyderabad” The real estate sector is in a revival mode and already the implementation of RERA has brought a lot of confidence amongst the buyers. The demonetisation is a positive move. With this, banks are going to have additional funds  hence, a fall in interest rates is  expected.  An early sign is seen with country’s largest lender State Bank of India cutting its deposit rates by 1.75 per cent. This would be followed by reduction in lending rates and thereby bring down the EMI for the ultimate consumers and improving their eligibility. This will help drive growth and development in the sector. The Real Estate sector is a significant contributor to the national GDP (approx. 7% ) and is a second largest employment generator and will continue to be the main driving force for the growth of the economy.”

He further added that, “The Secondary markets, where there is a prevalence of cash transactions might be affected as unaccounted cash payment would no longer take place leading to some dips in the sale process for assets that are sold or purchased in the short term. However, with the 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 are likely to factor that into the sale price. Overall we can expect to witness positive reforms and sales growth in the housing sector. This is a win-win situation for developers and home buyers”. 

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The move will have overall positive impacts on the sector. It will bring much needed efficiency, Transparency & affordability which are integral premises for a welfare state and full fledged development of the economy.

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