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Price gap to close between resale, primary real estate markets after demonetisation

With demonetisation mopping up black money, price difference in primary and resale markets is reducing

real estate Updated: Nov 26, 2016 16:49 IST
demonetisation,black money,property
With demonetisation mopping up black money, price difference in primary and resale markets is reducing.(Illustration: Abhimanyu Sinha)

The government’s decision to ban Rs 500 and Rs 1000 notes has impacted real estate sales, especially resale deals which usually involve cash payment of at least 50%.While the black money component has been reduced to an extent, real estate experts expect the gap to close between prices in the resale and primary markets.

Deals in primary (new launches) market are largely transparent so prices are lower. However, as transactions between the buyer and seller in the resale market prices are largely in cash, prices are higher and deals are usually in black. To illustrate, if a property is priced at Rs 25,000 per sq ft in a top-of-the-line apartment block in Gurgaon, buyers will pay Rs 10,000 per sq ft in white (considering that circle rates in the area are in the sub Rs 12,000 per sq ft range) and the remaining Rs 15,000 per sq ft in black to avoid high stamp duty. Sellers also save on capital gains tax. All this is now set to change. Properties have to now be bought all in white. These could have to be either registered at Rs 25,000 per sq ft or prices would have to be corrected Demonetisation is thus likely to set a new price paradigm

For more: Will HNIs and NRIs quit realty market because of demonetisation?

In the mid term, price gaps between resale properties and those bought directly from builders will narrow, says Anckur Srivasttava of GenReal Advisers. The arbitrage between secondary resale product and a comparatively new launch will narrow down and leave buyers with very few options in the resale market. Many will now prefer purchasing property directly from the developer.

Realty sources reveal that currently many people have put off decisions to buy property in the next two to three months as won’t be able to pay in black in the old currency. Many are hoping to generate funds in the new currency and purchase property in the next three months in black. That’s why experts are recommending quick follow-up steps from the government to ensure that the black and white cycle does not repeat itself.

For more: Realty markets to face pain for later gain following demonetisation

If demonetisation is not followed by consistent proactive measures by the government, the segment is likely to be flush with black money again in the next two to three months. “Demonetisation should not be an isolated measure. It needs to be followed up with steps such as rationalisation of stamp duty and dynamic monitoring of market rates and circle rates in different markets,” says Srivasttava.

Dhiraj Singh, a broker active in the Noida market, says that currently most properties in the Greater Noida West market are available for Rs 3,200 per sq ft both with the builder (new) and in the resale market.

“But for the last few days the resale market is almost dead as no cash deals are taking place in the market. Customers are playing the wait and watch game until December 31,” he says.

Noida’s sectors 78 and 79, areas primarily dependent on resale, have not seen any transactions in the last few weeks. “The circle rates in the area are around Rs 4,300 per sq ft whereas the price in the resale market is around Rs 5,000 per sq ft. Nobody is willing the bridge the difference by paying the amount in black. In Central Noida, there is absolutely no inventory in the primary market. Therefore, realty markets in this area is primarily resale driven and that will take a backseat for a few months,” he says.

Sales are only taking place in Sector 150 where the units are retailing at Rs 4,200 per sq ft to Rs 4,400 per sq ft and that too direct builder sales,” he says.

In Gurgaon too the story is the same. Along Dwarka Expressway and other sectors such as 81, rates of properties in the resale and the primary market are more or less the same - around Rs 4,000 oer sq ft to Rs 6,000 per sq ft,” says a broker operating in that area.

Another impact of demonetisation will be that interest rates will come down and boost activity in the primary market. “Once the rates come down and the Real Estate Regulatory Act comes into force, end-user activity will increase. However, falling interest rates will induce momentum in the market. There is every chance of resale property prices falling. In case of primary market, if the benchmark is Rs 5,000 per sq ft, so it cannot increase to Rs 8,000 per sq ft even where the amenities and the location of the project are better compared to other projects. Down the line, prices will rationalise but wherever they are abnormal, correction will take place,” says Shveta Jain, managing director – residential services at Cushman & Wakefield.

For more:Online search for property dips by 15% to 20% after demonetisation

First Published: Nov 26, 2016 16:49 IST