Optima Engineers and Developers A Group of Architects, Engineers and Valuers

2/B SIDDH-SHILA, OPP. JIVAN BHARTI, NANPURA, TIMALIAWAD, SURAT. 395001. Email: siddharth@optimadevelopers.com

www.optimadevelopers.com

Effect of demonetization of 500 & 1000 rupee note on real estate & property valuation in India

A. Figures of black money in real estate Real estate sector consumes major part of the black money in India. The size of the India’s black economy expanded rapidly over the 1970s and 1980s and remains

bigger than the overall economic size of countries like Thailand and Argentina. The size of India’s black economy is about USD 460 billion* (over Rs 30 lakh crore*).

In the year to June 2012, about $6 billion*, or 30 percent of total transactions in the property sector, were executed using black money, according to ‘Liases Foras’, a consultancy.

Real estate accounts for more than a 10th of India's $1.85 trillion* economy. So if we calculate that 30% comes from black money than it’s approximately equals to USD 400 Billion.* So it’s proved that major chunk of BLACK Money goes to Real Estate sector in different form (assuming figures from research)

B. Immediate effect on real estate of Gujarat (especially in Surat) Local property market has been divided in two segments based on old & new currency. Rates of

property vary based on currency type. Ex. If fair market value was Rs. 5000/Sqft (before 8th November) then current rates are as follows,

o Old currency : Rs. 7000/Sqft (almost 30 % up) o New currency / white : Rs. 4000/Sqft (almost 20 % down)

In general property rates are hyped by 25 to 30 % by the builders who have applied for IDS scheme.

Builders are recovering tax paid by them in IDS scheme through clients having black money.

Properties are in high demand which can be exchanged with old notes. Builders who have not applied for IDS scheme are covering black money by selling properties

from their projects with old currency to purchase new open land at higher rates. Adjustment of unsecured loan by builders with ‘hawala’ of properties from their own projects.

Cancellation of land deals as it involves huge amount of cash transaction. Builders are receiving lot of cash (old notes) in the form of due payment of sold properties.

C. Future projection in the real estate market Rate of interest will be revised in near future (expected rate revision of interest rates is 6 to 7 %)

‘Jantri’ rates will be revised by Gujarat government & gap between white & black proportion will be around 20 to 30 %. (70 % white & 30 % black as compared to existing proportion of 30 % white & 70 % black)

There will be limited transections in the market due to heavy cash crunch for at least few months after 31st march 2017.

Properties will be purchased by genuine end users as they will get the property in significantly cheaper rates.

Most of the transactions will be done with 15 to 20 % of down payment & rest of the amount by EMIs.

Very less new schemes will be introduced by the builders for next two years. Business in real estate will get worse with the implementation of RERA act 2016 after

demonetization of currency.

Optima Engineers and Developers A Group of Architects, Engineers and Valuers

2/B SIDDH-SHILA, OPP. JIVAN BHARTI, NANPURA, TIMALIAWAD, SURAT. 395001. Email: siddharth@optimadevelopers.com

www.optimadevelopers.com

D. Suggestions for banks / FIs regarding property valuation in this critical situation Demonetization of currency in the nation with the population of more than 1.25 billion can be a

complex situation to analyses the market in only few days. All banks and FIs must inform their new policies to empanelled valuers for better synchronization

& accuracy in the valuation process in this difficult situation. Recent cases with high exposure & high LTV are to be dealt with utmost care.

Identification of recent overfunded cases for risk assessment. Those cases should be assessed with the scrutiny of customer’s business profile.

Valuation initiation should be monitored carefully by credit team. Valuers should not be pressurized for retaining or increasing the value of property in this situation

& his opinion should be discussed whenever required. Review of market scenario should be discussed with valuers by credit team every week for next

few months. There may be a huge difference in the valuation of property done by different valuers due to non-

uniformity of real estate market after the demonetization.

Notes: 1. Above information is provided purely based on experience & market knowhow. Author is not legally

liable for any debatable or incorrect information. 2. “*” marked igures are adopted from internet & authenticity of the data must be verified if required.

Siddharth Choksi +91-99798-75918