News Point: The abolition of Rs. 500 and Rs. 1000 currency is bad news for real estate; even long term benefits questionable.
Some facts that suggest real estate is intrinsically linked to cash transactions:
- Real estate is the only avenue (after stock market & gold getting organized) where one can park black money
- Property valuation mechanism missing in India and hence cash transaction is a reality
- Circle rate anomaly also brings cash component in real estate transactions
- Secondary market transactions demand higher cash component to save stamp duty
The abolition of currency of Rs. 500 and Rs. 1000 has hence come as a shock to the market in general and the real estate market in particular. The apprehension is that already slow moving market may come to a standstill for some time, till there is clarity over the circulation and transaction of the new currency and its withdrawal limit from the bank.
The apprehension is as much in the minds of the home buyers as the developers. Though officially the sector has welcomed the move of Prime Minister on the expected lines, but privately they admit that the kind of cash that they are sitting over is a major cause of pain. Over and above that the new buyers will now wait & watch before committing over the new acquisition and negotiating with the developers over the cash component part.
“This is a transformational reform by the Modi Government. Real estate transactions in progress and not completed that involve cash will be impacted, leading to complications. This will certainly lead to pain in the realty sector in the short term, but it is a welcome move for the long run,” admits Ravi Ahuja, Executive Director, Office Services & Investment Sales at Colliers International.
Geetamber Anand, President – CREDAI National, as usual, tries to put up a brave face when he says that effectively the primary market will not be very disturbed as the inventory was sold to end users who avail home loans. Moreover, the organised part of the real estate industry has always been compliant and it is only the unorganised fly-by-night players who will be affected.
“This move will help industry to fight more effectively for removal of section 43CA of the IT act as now there is no reason to charge tax on so called deemed income to both the buyer and seller post this move,” says Anand.
Anuj Puri, Chairman & Country Head, JLL India also adds that black money deals are more common on the unorganized market, but this practice has, in fact, been on the decrease with greater awareness on the part of buyers. “Before too long, the caricatured version of black money driving Indian real estate is no longer applicable.”
However, the home buyers are not convinced who maintain that the cash component is a reality even in the organized market by the established players. The abolition is hence a dampener.
Sanket Sharma, a home buyer in Noida maintains that the cash transactions are not avoided even when one is availing 85 per cent loan. This is because the property in most of such cases is registered on the circle rate and the rest amount is being paid in cash.
“Even the developers insist on cash to save taxes on their part. For the buyers it not only serves to exhaust the unaccounted money but also helps in lower stamp duty. This is a rampant practice and everyone knows about it. The only question is to what extent the new currency will curb it and how and when the ways & means are developed to deal with this short term shock,” say Sharma.
Requesting anonymity, a Gurgaon-based developer admits that the property market that is already slow will be even slower now. According to him, not only the home buyers will not come forward to book new property and negotiate for the cash deal for some time, even the builders will go slow as they have to deal with the reality of adjusting already accumulated cash.
“For long we used to manage it since we were paying even the salaries to the staff as cash. But now with the prevailing currency being abolished, even this is not possible. Then the cash purchase that we have with the vendors would stop. So, practically the real estate will come to a standstill for some time,” admits this developer.
In a nutshell, the abolition of currency of Rs. 500 and Rs. 1000 is shock wave for the real estate market. While the government maintains that it will clean the market, the developers and the home buyers do not seem to be convinced.
By: Ravi Sinha
