Painful demonetisation could lead to a cleaner and more accessible real estate sector

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Manu Balachandran, Madhura Karnik | Quartz India | Dec 13, 2016, 12.00 P.M IST

India’s real estate sector, which accounts for about 7% of the country’s GDP, has seen demand dry up drastically following Narendra Modi’s decision to demonetise the Rs 500 and Rs 1,000 notes. Much of that is because a significant part of the transactions in the sector is cash-based.

“In the real estate development cycle, black money is utilised mostly at the land acquisition stage and also during secondary sale of residential units and strata sale of commercial units,” real estate research firm Colliers International said in a report. “This quantum varies and is higher in business community-dominated cities as compared to cities dominated by the salaried class.”

For decades, Indian real estate has been an attractive investment option for businessmen and politicians to park black money. In most transactions in the sector, sale documents don’t reveal the actual property price. Sometimes, sellers receive up to 60% of payment in cash, which remains unaccounted for. Cash deals help avoid stamp duty and registration charges, which add over 5% to the price.

The primary market usually involves only the property buyer and developer, and so doesn’t quite dictate pricing. It is the cash-rich secondary market, where investors engage in sale and resale, that plays a crucial role in fixing prices.

Consumers in the Delhi National Capital Region (NCR), Mumbai Metropolitan Region, and some tier II geographies like Surat and Vadodara would feel the pain severely, Narasimha Jayakumar, COO of 99acres, an online real estate sales platform, wrote on Moneycontrol. “Minimal impact of demonetisation has been felt in markets such as Bangalore, Pune and Chennai, which are primarily end-user driven and rely on bank funding,” he wrote.

Even the CREDAI, the apex body of real estate developers agrees. “CREDAI expects the mop up of black money to also lead to higher tax collection and a lower rate of personal and corporate income tax from the next financial year onwards,” the organisation said in a statement. “In other words, demonetisation would put more money into the pockets of home purchasers through lower tax burden and incentives for home ownership.”

In the long term, the source of funds in India’s real estate sector could see increased transparency, and, hence, instill trust among consumers. “This will lead to an economy that is more aligned to global compliance standards and an industry with high levels of corporate governance making it easier for foreign entities to invest in India,” Colliers said.

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