The dramatic event of conversion of currency by Government has left a trail, that will be remembered for long time. This novel idea of curbing black money, fighting terrorism and removing counterfeit currency has engrossed people from all spheres of life in India. For50 days all & sundry have participated in this event either willingly or by compulsion.

While the industrial sectors are engaged in assessing the pros and cons of this event and trying to fathom a future course of action for them, some of the major repercussions are being felt by people engaged in Real Estate development and allied sectors that include lending sector as well. Real estate is an overall contributor of about 9 percent to India’s GDP, and one of the most capital-intensive sectors in India. Property values have been the biggest point of apprehension for investors, builders, lenders and other constituents. On the surface there seems no cheer at all, rather the doubts, fear, anxiety and uncertainty is lingering in the minds of real estate participants.

Valuers, being the advisors to both real estate and money lending sectors, have compulsorily become a participant in this amphitheatre. And not just participants, but have also been assigned a very crucial role to play. The word of mouth remains as treacherous as ever in influencing the opinions although a lot has been analysed and even more has been said about the impact of demonetization on real estate. These are the times when analysis and judgment of Valuer becomes very important.

How does all this affect the Fair Market Value Opinion!!

Some parameters that may be useful to comprehend the situation, a bit more clearly.


(i) Reserve Bank of India

The Reserve Bank of India has cut its GDP growth forecast for current financial year from 7.6 % to 7.1%, citing the demonetization exercise that sucked 86% of currency in circulation for some time.

(ii) International Rating Agencies

International Rating agencies have kept the rating of India as investment destination to “Baa3” Rating by Moody’s and “Stable” by S&P, indicating no change in perception of investors.

On November 16, 2016 — Moody’s affirmed the Government of India’s “Baa3” issue and senior unsecured ratings and maintained the positive outlook on the rating. It bases the decision to maintain a positive outlook on the rating rather than assigning a stable outlook to the rating reflecting two drivers:

(a) Economic and institutional reforms introduced since the positive outlook was assigned, and potentially forthcoming, continue to offer a reasonable expectation that India’s growth will outperform that of its peers over the medium term and that further improvements in its macro-economic and institutional profile will be achieved.

(b) However, the reform effort to date has not yet achieved the conditions that would support an upgrade to Baa2, in particular in accelerating private investment to support high, stable growth, without which the government’s debt burden — a key constraint on the rating — is likely to remain high for a sustained period.

Rating agency Fitch also lowered India’s GDP growth forecast for this fiscal to 6.9% from 7.4%. Fitch said, adding the medium-term effect of the currency withdrawal on GDP growth is uncertain, but is unlikely to be large. Morgan Stanley the growth forecast for 2017 has been slashed to 7.6% from the earlier 7.8%. For 2018, the growth is pegged at 7.8%.

(iii) Other Rating Agencies

Leading Credit Rating Agency of India, ICRA has opined that India (rated Baa3 positive by Moody’s) will remain one of the fastest growing major economies globally in 2017, although GDP growth will moderate in the first half of the year, as the economy adjusts after demonetization. ICRA expects the country’s growth of gross value added at basic prices to remain healthy in 2017, although such growth will ease somewhat to about 6.6% from around 7.0% in 2016, with a likely pick-up in Second Half of Year 2017

(iv) National Stock Exchange

(a)The CNX Reality Index that fell from 198 level on 8th November to 152 level on 22nd December recovered to 179 by 6thJanuary 2017, indicating a cause of concern for organized real estate sector but not to an extent of big turmoil. The fact remains that real estate sector has already been under pressure for last 4 years and has limited scope for a further downslide.

(b) The CNX Infrastructure Index for same period indeed improved to 2810 post demonetization from 2779 of 8th November after touching a low of 2623 during 22nd December 2016.This clearly points to optimism in the Infrastructure sector

(v) The Index of Industrial Production (IIP)

The Index of Industrial Production (IIP) indicated a recovery in November -December after slipping for a while in October2016.

(vi) Government of India has assured to support low cost housing by way of low cost housing loans, tax benefits, infrastructure funding.

All the above economic parameters cumulate to give a picture that ranges from stability to cautious optimism but, certainly not of pessimism on economic front.


(i)The Primary Sales of Housing Units, as indicated by market reports, fell by about 35-40% during Nov-December 2016 indicating the adverse sentiment among home buyers although no steep fall in prices of dwelling units has been reported.

(ii) While almost all the newspapers have indicated steep fall the property prices during November-December period. In fact, the secondary market for property transactions has been hit by illiquidity. Since there is a need for more transparency in property transactions now, the willing buyer at Arm’s length distance is seeking an appropriate discount to the earlier prevailing prices, just to make up for changed costs of transactions.

Similarly the Willing Seller is seeking to rethink about the additional tax liability that it will have to incur in case of total transparent transaction. Thus willing participants in market transactions are holding back for the time being, leading to ill-liquidity in market.

(iii) As reported by various National & International Real Estate Consultants the demand for rentals in Tier I & tier II cities remained firm & lease rentals remained strong despite demonetization.
(iv)Bank’s interest rates have started to come down.


(i) Land

The Value of land is the subject that has generated the maximum anxiousness among investors, sellers and stakeholders. The anxiety pertains to the component of unaccounted cash in open market land transactions. The gray natures of land transactions has invoked highest decibels, and are of highest cause of concern for valuers especially when property being valued is for mortgage lending purpose. In the event of willingness of market participants to transact in transparent manner, the effect of demonetization on property can be worked up based upon:

(a)The prevalent percentage of cash component in earlier transactions (pre demonetization period transactions)

(b)The costs/ taxes rate payable by holder of unaccounted cash money for conversion of such cash into accountable money.

(c) Additional Stamp Duty payable by buyer due to increased documented transaction value

(d)The buyer’s borrowing capacity, as buyer may need to borrow additional accounted funds for making a purchase.

(e) The additional tax liability on Seller by way of Capital Gains on increased transaction value.

The Sale Value of land continues to be affected by other factors like:

(a)The inherent demand –supply matrix for land for development

(b)The dominant sentiment among land buyers,

(c)Prevailing Returns in alternative investments.


The labor costs, the steel, cement and construction material prices have remained stable or increased marginally. The Cost of Construction has not gone down due to demonetization. It suggests that downside in property prices, if any, for readily built apartments, flats, offices etc can only be attributed to its land share component and not to the building component.


One of the most obvious effects of demonetization is the fall interest rates, as indicated by major banks. This when coupled with strong demand for rental properties leading to increased rental income, the capital value of investment properties can only go upward, despite demonetization.
While most of the factors that affect the real estate can be mathematically analyzed, what cannot be easily analyzed is the quantum of sentiment. A professional can resist the temptation of giving excessive weightage to transient sentiments over more fundamental factors.

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