Even as the bolt-from-the-blue announcement of demonetising large denomination currency and efforts to transform India into a less-cash economy continues to reverberate and confuse people as to how to spend and save money, the biggest collateral damage seems to have happened to one of the most preferred asset classes – real estate. There is a palpable lull in the buying and selling of properties ever since cash has ceased to be the king because the foundation of buying and selling properties was, unfortunately, built on cash transactions.
It is said “nothing lasts forever,” and the everlasting belief of real estate being a great investment now turns out to be a myth. The self-made rules of investing in this asset class are about to change which will change the financial landscape of real estate investment.
There are mixed views and discussions that are happening on the exact valuations of existing properties held by people – properties that are self-dwelled, those which were invested for rental income (ready houses), for future construction (vacant plots) and for disposing at later stages in life to meet future events.
This move to demonetise currency has taught a big lesson for those who were complacent, those who had concentrated exposure to single assets and for those who thought they would make astounding returns from such investments.
Since cash dealings were an accepted norm creating unaccounted money for the seller, managing the same unaccounted money for the buyer had become an accepted norm; an accepted evil, in fact. The difference between the government notified rates and market rates differed enormously, taking the valuations to dizzying heights and also setting wrong and false benchmarks of prices across all localities. In most cases the price rise had been beyond the reach of the common man and also the year-on- year inflation in this asset class was much above the average and affordable levels.
Questions remain
The million dollar questions now are (1) What is the future of the existing investments if invested for other than self-occupation? (2) How to understand and visualise the future return on investment? (3) Whether to invest further or not?
When decisions of this magnitude happen it is bound to put a lot of things in disarray because of kneejerk reactions and wrong assumptions. We have to give adequate time for things to settle down and wait for consensus to emerge which will happen gradually; the ripples have to stop before the water becomes clear again.
The valuations will definitely take a hit because the process of market prices (which had a large component of cash) aligning with government notified prices will start though such notified prices may not be as high as one had thought they would be.
For instance, you own a 1000 sq. ft. house whose market value had been ruling till recently at Rs.5,000 per sq. ft., making the valuation as Rs.50 lakh. Now, the same could be valued much lower assuming the government notified prices are Rs.2,500 per sq. ft., taking the valuation down to Rs. 25 lakh; half of what it was assumed to be.
One has to importantly note that the assumption of valuations were largely based on market prices which invariably had cash component. This understanding will now change and will have to wait for how the changes will impact at different levels for different stakeholders.
Assumptions will change
Further, return on investment from real estate was quite exaggerated till now and was largely notional. Such exaggerated assumptions will change and the returns on an annual basis could be in the range of 10% to 15% pre-tax. Compared to returns from debt and gold, these will be still good.
As diversification and part of the overall asset class distribution, one should continue to invest in real estate because it will remain to be a dependable and comfort asset.
But for this to be a comfort asset, one has to change the outlook of the return expectation since people have been investing for centuries under the impression that this asset class can offer incredible returns.
Moderation advised
Once real estate as an investment is seen and viewed as just one of the asset classes with moderate return expectations, then the heartbreak situations when some distortions take place will lessen.
But to be true, one has to create a society that is beyond cash transactions. Unaccounted money circulation can be stopped only when accepting or giving cash is done away with. Otherwise such cash finds a way moving from one hand to another.
