As an analogy to the current crisis in Indian Real Estate due to the Modi Effect, I asked someone if people migrate from Colgate to Pepsodent, what will Colgate do? This is in response to the assertion that property prices are going to increase after January because people will tend to move towards standard builders thereby creating a demand.
The real impact of Modi Effect is that any sector dealing with paper money crashed big time. Take, for example, cement. It’s not that JK Cement or Ultratech are dealing with black money. It’s their dealer base which is doing this, to some extent. Every company took a beating based on the number of dealerships which collapsed. The crash of cement share prices reflect this concern – less paper money and consequently, less sales. A big player who lost considerable market share, what will he do? This is one aspect of the issue.
Another is the much bigger one – the property deals itself. A builder thinks of constructing an apartment block and zeroes in on a property. He says, I will give 50 lakhs for the bit, but the deal should be written only for 30 lakhs. What does he save there? Let’s say that stamp duty of a property is 8%. If it is 50 lakhs, the cost of the property becomes 54 lakhs. If it is 30 lakhs, he will pay 2.4 lakhs as stamp duty – he saves 1.6 lakhs. May be, he will share a part of this savings to the seller and the end customer. This is more prominent in second hand deals. With the general sentiment of paper money prominence in real estate, everything related to real estate from raw material to finished product crashed big time.
With what Modi did, the builder will have the 2.6 lakhs as unaccountable income for which he will either pay a fine or will destroy it. If I buy a flat from such a builder and if the tax authorities catch him, what’s the guarantee that my investement will still survive? I would rather not buy from him and either cancel the deal or go for a better one. Now, who is this builder? Surely not the top notch one who does shady deals. This means that any small builder is going to see a market crash and a big builder will see a higher demand. Now, what will the small builder do? It’s here that the analogy of Pepsodent and Colgate come.
In both the case of cement and flat, they will reduce the rates to recover their market share. First case, with reduced raw material cost, cost of construction is going to go down and with that cost of an apartment. And with crashing sales, a builder will reduce the property prices. If we assume the gap between a top notch one and an average one is 10 lakhs before and 20 lakhs after the migration, he will increase it to 25 lakhs. He loses 5 lakhs but seeing the gap widening, people flock to the smaller ones. With a diminishing market, the big builder will be forced to reduce the gap to 10 lakhs again.
Synopsis? Cost of raw material will go down reducing cost of construction and cost of property will first go up by Jan and then go down, may be by March. So, what shall we do? Wait and watch, or take a risk?

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