Will Demonetization Affect Real Estate in Kerala: The Stark Reality of Business

demonetization affects real estate kerala


This word has been haunting us for a while since the night of Nov 8th, 2016 when a flash announcement was made by the Prime Minister’s office to de-legitimise Rupees 500 and 1000 notes already in the market. People argued on Social media and in real life over the peril caused by this move. Many hunches were made; some were proved to be true while the others were washed away by facts. One of the victims, so to say of some confusing articles and unconfirmed views appearing in various media chasing sensation, unfortunately, has been the Real Estate market. But did demonetization affects real estate Kerala? Here comes the answer to your question.

How demonetization affects Real Estate Kerala sector?

The misconception regarding whether demonetization affects real estate Kerala originates from the wrong belief that Real Estate business as a whole is propped heavily by black money. This is misinterpreted information. The much-touted news, which is yet to be substantiated, is that the entire Real Estate market is likely to crash by 20-30%.  To lend some clarity, it would be worthwhile to delve deeper into the back end of the Real Estate business. A better understanding of the ways in which demonetization affects Real Estate Kerala business will enlighten us and help to eliminate some misconceptions on the matter.

Is the entire Real Estate market seen as one?



How Affordable Housing in Kerala Remains Unaffected by Demonetization?

Quoting from an article from the Business section of The Hindu, as per Mr. Sunil Rohokale, MD & CEO, ASK group (a leading property investment advisory) Real Estate can be divided into Residential, Commercial, Retail, Agricultural land and Industrial segments. Tue that Black money does influence a bit of the Real Estate business but it applies traditionally to the agricultural sector mostly. The Real Estate business can further be classified into Organised/bankable, less organized and non-organised or non-bankable. There exist a few developers mostly in the un-bankable segment who undertake dealings in cash, but the percentage of them are today quite low. This small percentage is however found to leave a blemish on the entire Real Estate business. Generalizing a whole sector on the basis of a few is obviously misleading.

Is there a Geographical Divide as far as the Real Estate scenario is concerned?

Just like every other business, geographical factors play an important role in Real Estate as well. The dependence of Real Estate on these factors is a bit more intense. For a contrast, in Northern parts of India, a larger number of prospective customers are self-employed where dealings in cash are common. In this case, the impact of demonetization affects Real Estate Kerala business is more profound as they have to deal with a lot of this cash. But in the Southern parts of India, which is relatively driven more by the organized sector, the number of customers who depend on monthly salary are much higher. Here, banking transactions come into picture which mostly eliminates the role of cash in Real Estate deals thus ushering in a great deal of transparency. Thus, we know how demonetization affects real estate Kerala business particularly in the South and that too in the residential segment will be much lower than what the Northern parts of India are likely to experience.

Will the impact of demonetization be different for different classes in housing?

The value of the product plays a major role in the fact that demonetization affects real estate Kerala. The luxury, premium segments and non-bankable segments are more affected by the move as they are characterized by surpluses where possibilities of cash for partial payments is not remote. In the affordable housing segment, however, most buyers depend highly on regulated and transparent banking transactions for their payment. Almost all the procedures associated with the purchase of a property, from land acquisition to construction to sales are effected via banking transactions.  The very premise of offering prices at highly competitive rates in the affordable housing segment is heavily hinged on the degree of transparency that has been so established more so over the recent years. Quite obviously, in this case, the demonetization move will have less to almost nil effect on the business. This implies that the affordable housing segment will see no price cuts as compared to the most premium segments of the business.

Do existing payment systems restrict the use of Black money in property deals?

There are laws laid out in the past that restrict the use of cash payments for the sale of immovable properties. The amendment made to the income tax act in 2015 has done just that. It was employed to keep a check on the cash payments made to buy immovable properties. This necessitated the use of cheque/ DD and RTGS for any payment made above Rs 20,000/-.
Stats reveal that the customers in India who purchase homes that cost between 25 lakhs and 50 lakhs which primarily fall under the affordable homes segment depend on far less on cash payments and more on bank loans. This is especially true for Kerala, as a large percentage of buyers in this segment belong to the salaried class where 20% of the amounts are paid via DD/Cheque/RTGS etc. and the balance is funded entirely by bank loans. As such the dependence of the affordable housing segment on cash is almost nil. It is only logical therefore to understand that the demonetization drive is not going to result in a price correction especially so in this segment.

How much does the price of land influence the final price of an Apartment?

The fact is that the price of land contributes to less than 25% of the total cost of any affordable housing project. Thus any impact that the demonetization drive may have on reduction in land prices will be less pronounced on the final price of the Apartment.

Table indicating Price Break - Affordable housing (Apartments)

Sl NoParticularsPrice in INR
1Material Cost 1100
3Overheads 350
4Cost of Land* 550
5Total Cost

6Margin 450
7Selling Price

*Cost of land accrues to <20% of selling price of an Apartment.

Will there be any impact on funding for Homes?

Due to the demonetization move, most banks are now receiving large deposits thus increasing the amount of liquidity and fund availability. This is likely to lower interest rates for loans to banks and other financial institutions now have more idle funds to invest. This reduction in interest rate will facilitate huge demand for homes as more customers would be eligible to avail housing loans. So contrary to the popular belief, prices, especially in the affordable segment where bank loans are highly popular, would increase. This increase in price will be more pronounced in certain locations of choice. The impact of demonetization is also likely to bring about a change in the savings habits of people, as there will be less affinity for hoarding cash, fixed deposits in banks will be less attractive, investments in assets like gold etc. are likely to be adversely impacted thus legitimate investment in land which is undoubtedly the most solid asset is likely to see improvement. In light of the above and other positive cues impacting the Indian economy as a whole, there is every likelihood of a surge in demand in the housing sector.

What will be the impact on the affordable housing segment (Apartments) in Kerala?

With the proliferation of nuclear families in Kerala and the increasing affluence of the middle class, more families are inclined to purchase a home of their own fueling demand for affordable housing. However as an available land area suitable for construction (area of land termed as `non-paddy fields`) in Kerala, especially in urban areas is scarce. With the current trend of inordinate delay in getting statutory and other mandatory government approval, the number of projects launched year after year is impacted. These factors restrict the supply of fresh property into the affordable Real Estate market. Prices are thus bound to increase rather than see a dip, especially in select locations.

What thus is the overall impact in the Real Estate market?

Rounding it off, the impact of demonetization on the Real Estate business especially the affordable housing (Apartments) is bound to take fewer hits than previously expected due to the reasons mentioned above. The impact of black money in the market will be curbed by the demonetization move but dealings in the affordable Real Estate segment will continue unabated.

A Ready reckoner on Impact of Demonitisation on Real Estate - Housing

Sl No.ParticularsImpact on Prize - Post DemonetizationRemarks
1Small Land HoldingsNil Impact
2Large Land Holdings Price likely to come down
3Ultra-Premium & Premium Housing Price may see a downward correction Based on demand and market impact of demonetisation
4Affordable Housing (Apartments) Nil Impact Demand likely to surge
5Rate of Interest on Home Loans Likely to come downCan fuel demand




Will Demonetization Affect Real Estate in Kerala: The Stark Reality of Business
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Will Demonetization Affect Real Estate in Kerala: The Stark Reality of Business
Check how demonetization affects real estate sector.
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  1. The impact of full non convertibility of Rs in the cooperative banks will affect Kerala almost immediately as most of the money is deposited in these banks due to higher interest rate. The Central Government also views that the cooperative sector contributes to the black economy as it does not report big inflows or outflows. Since the state governments are very much involve in the cooperative sectors , any disruptions to it will impede development and maintenance. This is in turn effect private investments.

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