Demonetisation - the post-Diwali jolt for the real estate sector
The winter chill in Mumbai is often scoffed at for being a poor apology of the real thing. But this time, weeks before the pleasant-by-Mumbai-standards season can set in, the real estate sector which determines a disproportionately large number of things in the city felt the shiver run down their collective spinemumbai Updated: Nov 10, 2016 10:48 IST
The winter chill in Mumbai is often scoffed at for being a poor apology of the real thing. But this time, weeks before the pleasant-by-Mumbai-standards season can set in, the real estate sector which determines a disproportionately large number of things in the city felt the shiver run down their collective spine. The demonetisation announced late on Tuesday evening left Rs 500 and Rs 1000 notes worthless knocking the bottom out of the sector which thrived on cash transactions.
The real estate sector in both the organised and unorganised areas, the high-rises and the slums, is a major generator and handler of black economy. While transactions in the slums are dominated by cash and remain outside the revenue system for the most part, those in the white-collar buildings have a white-to-black ratio of 70-30 or 60-40 or even 50-50 depending upon the area in which property or houses are. Industry analysts have said in the past that between 50% and 70% of all transactions in the city have cash components.
All those ill-gotten riches accumulated by the builders in the last few weeks or months are now worth nothing. And their calculations for the immediate future are thrown asunder. The real estate comprised nearly 30% of all undisclosed income during searches conducted by the Income Tax department in 2015-16 with Mumbai and Delhi accounting for most of it, Santosh Kumar Gangwar, Minister of State for Finance, informed the Lok Sabha this July. The manufacturing sector is a close competitor.
The real estate sector had not responded with enthusiasm to the central government’s Income Declaration Scheme which closed on September 30 because most builders were deep in liquidity problems and paying off the tax on undisclosed incomes in addition to regular taxes would have drained out their finances, an industry representative told me. They had appealed for – and expected – time till December 31, he added. But they had not seen this crackdown on black money coming.
The demonetisation should increase transparency in property transactions. But while the salaried classes will welcome it, the real estate czars are unlikely to see more transparency as a positive development. It disturbs their business matrix and unsettles the entire pipeline which facilitates the cash transactions. Right from the time land rights are purchased to getting it converted to the right category, procuring dozens of approvals, purchasing construction material, and paying contractors and workers, considerably large amounts of cash have changed hands; this, the developers seek to replenish with the black money component from property buyers, explain analysts from property consultancy firms.
Given this, the increased transparency will affect the entire pipeline which comprises, besides the builders themselves, politicians of varying influence across parties, bureaucrats who hand out approvals and carry out registrations and so on, and agents or local strongmen who facilitate these transactions. Until the cabal leaders imagine a way around the new system – which they will sooner than later – expect the prevailing sluggishness in the real estate market to continue and some whining from the big boys.
The real estate sector is a law unto itself. Its influence has amplified in the past few decades – from policy-making and determining rules of urban development, bending common sense to private profit motive and abandoning (or nearly abandoning) affordable housing market, to refusing to lower prices despite large unsold inventory. Its unwillingness to be regulated meant that Mumbai has been hostage to its narrow self-serving interests. From high-rises allowed to come up too close to the flight path of Mumbai airport to opening up buffer zones near Grade I heritage buildings and in green zones for construction, every decision carries the stamp of this sector.
For years, the real estate czars and the politico-bureaucratic class fed off one another – to the detriment of the city. If the demonetisation and transparency reorganise the matrix to the benefit of buyers, if prices drop even marginally, the post-Diwali jolt would have served a purpose.