Ways to boost real estate sector post demonetisation

January 2, 2017 MoneyControl By LODHA

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This high cost is in itself an incentive to introduce cash into a deal and save the stamp costs in realty transactions. Here are a few steps government should take to help real estate sector.

The realty sector has been suffering from a severe downturn during the last two years. While the published prices have been stable, actual transactions have shown a price drop in excess of 25% due to poor demand. A report released by the property consulting firm Liases Foras during May 2016 suggests that unsold inventory with builders has exploded, reaching 2.26 lakh apartments in Mumbai Metropolitan Region and 85,000 flats in Greater Mumbai. In the National Capital Region (NCR) the inventory of unsold flats was 2.67 lakh units.

A Knight Frank survey for July-December 2015 put the unsold inventory across India at about seven lakh housing units in just the major cities of Mumbai, NCR, Pune, Bengaluru, Chennai, Hyderabad, Kolkata, and Ahmedabad. Total unsold inventory in Bengaluru, which includes under construction projects apart from unsold inventory in completed projects, is 82,357 according to Confederation of Real Estate Association of India’s (Credai) Bengaluru chapter in association with independent property consultant JLL. ASSOCHAM had slightly more conservative figures. It said the NCR residential market has an estimated 2,50,000 units of unsold inventory which is approximately 35% of the units under construction.

Bangalore followed Mumbai with 66,000 units, Chennai with 60,000 units and Pune followed with 55,000 units. These inventory figures do not include selling by investors in apartments, or the usual selling by property owners who dispose off their properties to raise funds for some need. Having experienced high growth for a couple of decades builders have expanded, most of them with high cost borrowings. The demand slow down has been a sort of double whammy for them. The poor demand coupled with the high cost of holding inventory has been aggravated by fears of the proposed taxation on completed and unsold apartments further damaging the developer’s finances. Meanwhile, on December 2, 2016 the Chairman of Confederation of Real Estate Association of India’s (Credai), Bengaluru has suggested that after a minor drop, apartment prices could gain 20% next year on the back of poor supply.

While this may well be wishful thinking by the industry, the consumer would be put to hardship if the Credai Chairman were to be right. The announcement of demonetisation of the Rs. 500 and Rs. 1000 currencies have provided a conversation topic that has pushed all other to the shade, since November 8. A clear loser in the analysis of economics, financial journalists and cocktail party chattereti is the realty sector. Several commentators have forecast a drop of 20 to 30% in apartment prices due to demonetisation. Whether this considers the effective price erosion of the past months entirely is unclear, but certainly there will be partial impact of demonetisation. We opine that over 80% of black money in cash is generated through realty transactions. One reason is the vast difference between the guidance value, which is the minimum considered for registration, and the market value. There is a high transaction cost in property, substantial part being stamp duty and registration. This high cost is in itself an incentive to introduce cash into a deal and save the stamp costs. The savings in income tax as well makes cash in transactions profitable for both buyer and seller of property. An unfortunate part of transacting in property is part payment of the sale proceeds in cash.

This has left several people who have sold their properties with substantial amounts in the currency that is now close to worthless considering the tax evaded on the property sale transaction. Demonetisation is not likely to be a panacea for the ‘black component’ menace in property dealing. New currency will replace the old and the cycle will recommence after a hiatus. The realty sector, not just developers, would gain with a drop in prices for consumers and smoother exit for developers. Towards this a ‘buyer’s tax’ on cash component could be introduced with a rate of 15% on the developer and 20% on the seller, for the resale of property. This scheme could be introduced as a special package to stimulate the market and property sellers who are holding money (It may not be entirely proper to address this as ‘black money’, as it is difficult to have precise definitions for black money). A stimulus to the realty sector would have several benefits. The economic benefits of a healthy realty sector are far reaching and are positive for many other sectors. The real estate industry is a source of substantial tax at the central and local government levels. It has positive knock-on effect on the cement, steel, logistics and auto sectors, in addition to being a massive employer of skilled and unskilled persons. The government could consider a few ways to help the sector and itself, with a focus on 1. Encouraging the developer to sell finished stock which is piled up in apartments, plots of developed layouts of residential property.

A ‘buyers’ and ‘sellers’ tax on the cash component would encourage transactions in unsold stock without a substantial drop in prices. 2. Resale, or subsequent sale of property would be encouraged. This would provide some liquidity to individuals and traders in realty. Positives of this are a more active realty market and taxes raised by the government. 3. Buyers and sellers should be allowed to do cash transaction within decent margin spreads, say 20 to- 30% over and above the guidance value. And the system display transparency in transactions. 4. A ‘buyers’ and ‘sellers’ tax on the cash component could have the corollary of allowing cash transactions for a margin, say about 15% above the guidance value. This is less than registration and stamp duty value. Transparency would also be gained by this. 5. The cash tax would encourage ordinary “clean” people to overcome current challenges without jeopardizing their ethics, positive intentions and industry. 6. This is better situation than what is seen major corruption happening all over especially after demonitisation. The author is founder & CEO, elEVAte Business Solutions