The ongoing cash scarcity is all set to derail the real estate business, a veritable hidey-hole for black money.
The Minister of State for Finance said in the Lok Sabha that nearly a third of the undisclosed income found during searches was parked in real estate.
The immediate effect of demonetisation will be to squeeze specific segments of the realty market such as land, the luxury segment and properties in tier-2/3 cities where the cash component is high and deals typically happen at prices much higher than government guideline rates.
Real estate research firm Liases Foras estimates that 30-40 per cent of real estate transactions involve black money. “Though exact data is not available, various studies done in the past suggest that 25-35 per cent of the transactions are done through cash. In tier-2/3 cities, the cash component accounts for over 50 per cent,” says Hitesh Singla, Principal Partner, Square Yards, a real estate advisory firm.
Regionally, while nearly a third of all deals in Delhi-NCR involve a cash component, in Mumbai, it is around 15-20 per cent. In Bengaluru, it is estimated to be the least, at 5-7 per cent, Singla says.
Cash is also relatively higher in land deals, in resale of property and in sale of small shops in commercial areas. These would be most hit as the avenues for transacting in unaccounted cash close.
Cash is attractive as it helps avoid stamp duty and registration charges, which can add over 5 per cent to the price. But what enables this is the lag in the revisions to the guideline value — the recommended registration price for real estate for each locality — which is set by the government. Data from HDFC Securities show that in the Mumbai market, prices move higher well before government revisions.
For instance, registration values in Mulund were hiked by 20 per cent in 2015 to ₹9,430 per square foot (sqft), but this was still 84 per cent lower than the estimated market price of ₹17,396 per sqft. So, a 1,000 sqft property that was registered would have had a cash component of ₹80 lakh.
“Circle rates are not updated frequently. When property prices shot up every quarter during the boom, there was a huge gap”, notes Samantak Das, Chief Economist and National Director Research at Knight Frank.
“Ready reckoner rates are generally much lower than the market rates, sometimes to the tune of over 50 per cent,” says Singla. The difference gives room to under-declare sale prices. This is particularly pronounced in secondary transactions in the luxury segment, where buyers tend to be business people with cash.
Developers too are eager to get cash. Land purchase involves rampant cash transactions; there are bribes to be paid for various approvals and for raw materials such as sand. Developers need cash to manage these and complete the project, notes Das.
Closing the gapState governments have been closing the gap by raising guideline values at a faster clip. Property registrations rake in sizeable revenue — the Karnataka Department of Stamps and Registration, for instance, netted ₹6,226 crore in 2013-14.
Likewise, the booming property market in the newly formed State of Telangana meant a 27 per cent increase in property registrations in 2015-16 and a 24 per cent year-on-year jump in revenue.
But the property market, in general, has been tepid and deals are down. A research report by Ambit Capital notes that property transaction volumes in Maharashtra and Tamil Nadu fell by 10-15 per cent in each of the last three years.
In fact, recently there has been downward revision in guideline values in slow markets. In Puduchery, for instance, the guideline value was reduced by 25 per cent in October. This was after property registrations dipped 6 per cent y-o-y to 34,000 deals in 2015-16, after an 8 per cent dip in the earlier year.
Likewise, the rates in Gurgaon were reduced by 15 per cent in June.