Ban on 500 and 1,000 rupee notes: Short-term shock, long-term benefit for property market

While the government maintains that the abolition of Rs 500 and Rs 1,000 notes will clean black money from the market, home buyers and developers fear the short-term slowdown while acknowledging the long-term benefits to the sector

The abolition of Rs 500 and Rs 1,000 currency notes, has come as a shock to Indian industries and the real estate market, in particular. The worry now, is that the realty market, which is already witnessing slow sales, 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 role of cash in real estate transactions:

  • Real estate is a major sector, where black money is parked.
  • The lack of a standardised and transparent mechanisms for property valuations, make cash transactions a reality, in this sector.
  • Anomalies in circle rates, also encourage the flow of cash in real estate transactions.
  • Secondary market transactions, generally have a higher cash component, to save on stamp duty costs.

 

Real estate industry’s reaction to the ban on Rs 500 and Rs 1,000 notes

While the sector has officially welcomed the prime minister’s move, privately, they admit that the kind of cash that they are sitting over, is a major concern. This is a transformational reform by the Modi government, asserts Ravi Ahuja, executive director, office services and investment sales, at Colliers International.

“Real estate transactions that are in progress and have not been completed and 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,” maintains Ahuja.

See also: Benami Transactions Bill: Will it reduce black money transactions in real estate?

Geetamber Anand, president – CREDAI National, feels that the primary markets will not be disturbed much, as the inventory is 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, he adds. “This move, will help the industry to fight for the removal of Section 43CA of the IT Act, as now, there is no reason to charge tax on so-called deemed income, on buyers and sellers,” says Anand.

 

Ban on Rs 500 and Rs 1,000 notes may not help, fear home buyers

Anuj Puri, chairman and country head, JLL India, agrees that black money deals, are more common in the unorganised market. However, this practice has been on the decline, with greater awareness among buyers, he says. The caricatured version, of black money driving Indian real estate, is no longer applicable, he maintains.

However, home buyers remain skeptical. Sanket Sharma, a home buyer in Noida, points out that the cash transactions cannot be avoided, even when one is availing a home loan of 85% of the property’s value. This is because, the property in most cases is registered on the circle rate and the remaining amount is paid in cash.

“Even developers insist on cash, to save taxes. For buyers, it not only serves to exhaust the unaccounted money, but also helps in lower stamp duty charges. 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 means will be developed, to deal with this short-term shock,” say Sharma.

 

Will the real estate market crash?

“The move by the prime minister, to ban Rs 500 and Rs 1,000 notes, to eliminate corruption and black money, will have a huge impact, on many markets where payment of cash is mandatory and is the major form of profit taking. These markets will see a major crash, making an already difficult situation even more challenging. In addition to eliminating black money, this will definitely bring down corruption, at least for a while. The policy that emerges over the medium to long-term, will determine how much corruption will return in due course,” elaborates Rohit Gera, managing director, Gera Developments and VP, CREDAI – Pune Metro.

Requesting anonymity, a Gurgaon-based developer, explains that home buyers will now avoid booking new property and try to negotiate on the cash amount, for some time. Even the builders will go slow, as they have to adjust the cash that they have already accumulated. “For long we used to manage it, as we were even paying the salaries to our staff as cash. Now, this will not be possible. Moreover, the cash purchases that we have with our vendors, will stop. So, practically, the real estate sector will come to a standstill for some time,” he concludes.

(The writer is CEO, Track2Realty)

 

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