- PM Modi banned the use of old 500 & 1000 rupee notes last night, to curb black money.
- Almost 1/3rd of Indian real estate survives on black money and cash transactions.
- Ban is expected to affect ongoing transactions where part of the property value is to be paid in cash.
- Property prices are expected to reduce as investors flee the market and developers correct prices to attract the end-user.
NEW DELHI: Prime Minister Narendra Modi’s decision to declare 500 and 1000 rupee currency notes in order to fight ‘black’ money will have far-reaching effects on the Indian real estate sector, which still thrives on off-record, cash transactions. Black money refers to incomes that are not disclosed to the government in order to avoid taxation.
“You may yourself have experienced when buying land or a house, that apart from the amount paid by cheque, a large amount is demanded in cash. This creates problems for an honest person in buying property. The misuse of cash has led to artificial increase in the cost of goods and services like houses, land, and higher education, health care and so on,” stated PM Modi.
Contributing to about 6% of India’s Gross Domestic Product (GDP), the real estate sector in the country is still largely unorganized. While organized players have largely moved to accept clean, ‘white’ transactions, there is no denying that most real estate transactions by the unorganized players are carried out with a part of the value paid in cash. This has also led to the sector becoming a hot favourite among people looking at investing and accumulating black money.
Developers welcomed the move, claiming that it will rid the sector of fly-by-night operators.
"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 Getamber Anand, president of developer body CREDAI-National
However real estate experts say there will be a short-term impact, especially on ongoing transactions.
“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,” says Ravi Ahuja, executive director of office services & investment sales at Colliers International.
Real estate experts are predicting that speculative investment in the real estate sector will come down, as investors will be unable to use their black money reserves. This in turn may see prices come down as developers correct prices to appeal to the end-user. Land prices too are expected to see a similar trend.
This coupled with recent moves on the establishment of a real estate regulator (RERA) is expected to cleanse India’s real estate sector, bringing home buyers confidence back into the markets while hopefully kick-starting growth once again.
“The banning of higher currency notes is a major move which will help curb unaccounted-for cash in the real estate sector. We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry. The effects will be far-reaching and immediate, and shake up the sector in no uncertain terms,” says Anuj Puri, chairman and country head of JLL India.