PM to crack down on benami property next: How to clean up real estate

Realty stocks have fallen almost a quarter after November 8, the day Prime Minister Narendra Modi announced his “surgical strike” on black money. Investors fear that the demand for residential real estate will slump because a lot of black money was deployed there. Much of their fears are true. The market has turned comatose after Mr Modi’s announcement. Prices could tumble up to 25 per cent in the next one or two quarters, builders reckon. 

More action is expected in the days to come: Mr Modi has said emphatically that he will next crack down on benami property. Mr Modi needs to move urgently on this promise and block black money in real estate in every possible way. There is some talk doing the rounds that he may put a cap on cash transactions in the sector: Anything above that will have to be paid in cheque.

 

More than the primary real estate market, cash is prevalent in the secondary market. Sellers routinely under-declare the value in order to save on tax. This is how black money gets generated. 

In the long run, some good could indeed come out of Mr Modi’s drive. Land prices in India are astronomical, easily amongst the highest in the world. Plus, it takes at least two years for a builder to get the mandatory sanctions from the government after he has purchased the land. During this period, the asset sits idle which, coupled with the speed money he pays, adds hugely to the builder’s costs. Moreover, builders normally get credit at higher rates than others. This is why most of them launch top-end projects — nobody these days seriously talks of affordable homes.   

With the crackdown on black money in real estate, which could trigger a demand meltdown, land prices will hopefully begin to cool. This could help builders come up with affordable homes. But for that, it is important to make all approvals transparent and remove all discretion from the hands of the bureaucrats. This will ensure that builders don’t have to pay speed money and their land bank does not idle for long.

Here, the states will have to take the lead — each state has its own sets of rules and regulations for real estate. That is why you will find that there are no pan-India builders in the country. Each chooses to do business in one or two states because it is not easy to get a fix on the rules and regulations in all the states. Some did try to go national but quickly retraced their steps once they realised that each city was a different market.

Regulation of builders, which protects home buyers, is important, but it is equally important to ensure that builders are not fleeced by errant politicians and bureaucrats. However, there is strong resistance to any change from the people who stand to lose from such a move — for obvious reasons.

Moreover, the speed money paid by builders is always in cash and the amounts are huge. The builder needs to routinely replenish this cash, which he does by doing deals in black. This is a big reason why builders opt for cash, even in primary sales. Unless this problem is nixed, any attempt to root out black money from real estate will fail to address the situation fully. 

It was precisely because of this prevalence of cash in the business that kept large corporations away from it. In the 1990s, many of them had said they would monetise their idle land holdings to launch real estate strong projects but they developed cold feet once they found out that a large chunk of the dealings were in cash.

To know how deep the rot runs, I would strongly recommend readers to go through an investigative report put out by Cobrapost in October 2014. In an investigation that lasted 18 months (it was codenamed Operation Black Ninja), the website found that 35 companies were ready to do deals in black money. The cash component, it said, ranged from 10 per cent to 90 per cent of the value of the unit. Some builders agreed to sell properties even before they had got the regulatory approvals, which was illegal, while some even accepted to take payments abroad through hawala.

Well begun is half done!


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