Are black money deals creeping back into the real estate sector barely 6 months after demonetisation which was supposed to put an end to such transactions? According to real estate sources, black money transactions have quietly made a re-entry, especially in the premium segment.
"Signals from real estate brokers reveal that real estate activity where part of the amount is paid in black is back. Post demonetisation, it was hoped that the black money component would reduce in the luxury market but that has not happened. Luxury market constitutes roughly 5-10 percent of the total size of the market. Properties, where the black component is typically being deployed, are over Rs 3 crore. New currency has replaced old money," says Pankaj Kapoor of Liases Foras, a Mumbai-based real estate rating and research firm.
Also, those into businesses such as jewellery, bars, pubs, restaurants etc have been accepting payments in new currency and in the process amassed huge amounts in cash in the last few months. This is the segment that is currently investing big time in real estate, says a market player in the know of such deals.
On November 8, government had announced the phasing out of old Rs 500 and Rs 1000 notes. The move was supposed to hit the real estate sector since it was expected to put a lid on cash transactions in property deals through black money. It was felt the luxury segment and land transactions would take the biggest hit as the cash component ranged between 30 percent to 50 percent of the deal value.
However, market players say most buyers now are being cautious and are not deploying their black monies in under-construction properties but in ready, cash flow-yielding assets. “They are wary of the fact that new initiatives to curb black money may be announced in the next few months and they would again get stuck. So, instead of hoarding cash, they are trying to get rid of surplus amounts by investing in ready income producing assets," says a broker privy to such transactions on condition of anonymity.
Citing an example of a transaction that took place in a certain NCR micro market recently, a real estate broker, says that for a property worth Rs 10 crore, the buyer paid only Rs 3 crore in white as that was a circle rate in the area. The remaining amount was paid in black. Even if the annual rental income from this property is Rs 65 lakh, the buyer will make almost 20 percent. This is also a way out to turn black money to white.
The segment that has suffered the most in the past few months are the plots. "Investors are not deploying surplus cash in buying speculative assets. This is perhaps the worst asset class post demonetisation," he says.
So, what has the modus operandi been like? Sources privy to such deals say that soon after demonetisation was announced, those with surplus cash started purchasing properties with old currency. The deal value included commission paid to the broker for accepting old notes. For instance, a buyer with a budget of Rs 1 crore in old currency would typically pay Rs 85 lakh for the said property and the rest was commission for the broker.
According to sources, several investors booked apartments in old currency notes until December last year but the deal was shown in the books only in February after the Budget. For instance, for a property worth Rs 1 crore, a buyer typically booked the apartment with Rs 40 lakh in old notes with the amount constituting the black component but the actual booking only took place in February with the value of the apartment shown as only Rs 60 lakh in the books and the buyer paying the amount in white.
However, developers claim that all primary deals entered into at their end are all cheque deals and there is not question of accepting any black component.
The real estate market ebbed in January and February but sales started picking up in March. The worst casualty of November’s note ban was the real estate sector with all eight major cities, including the most resilient Bengaluru, witnessing a major crash in sales. Sales volumes dropped by 44 percent year-on-year (y-o-y) and new launches fell by a massive 61 percent, says a report by Knight Frank India.
Real estate experts say that measures such as demonetisation will not work in isolation. A permanent solution involves rationalising the tax structure and stamp duties is the need of the hour. "The note ban is a futuristic step rather than a retrospective measure. The government needs to ensure that circle rates reflect the market reality and are revised frequently. Long gaps in revision kill the objective of circle rates," says Samantak Das, Chief Economist and National Director, Research, Knight Frank (India).
Das suggests that state governments set up a machinery to understand the market better, go for frequent revisions of circle rates to ensure that buyers and sellers pay stamp duties and the exchequer gets revenues.
A report titled Currency Demonetisation: Short Term Pain, Long Term Gain by Assocham, says that demonetisation will wipe out the stock of ill-gotten wealth held in cash, while doing little about the wealth that has been converted to assets such as land and gold.
“Lowering stamp taxes on property transactions would incentivise the lower levels of evasion associated with such transactions. Further, electronic registration of real estate transactions (and re-registration of existing ownership claims) to match individual identification numbers will go a good distance in minimising the channeling of corrupt earnings into real estate," says the report.