PROPERTY WARS: INDIA
The country’s real estate boom may bust amid a crackdown on secret payments,
NEW DELHI— Siddharth Sharma, a salaried aviation consultant, was looking to buy an apartment near New Delhi. Of the eight projects he viewed, developers of three expected part-payment in cash, an illegal but common demand in India.
“With my salary, I don’t generate much cash,” said Sharma, 43. “For me to cough up so much was impossible. I had to cross those builders off my list.”
The practice of investing in real estate with untaxed income or unaccounted wealth is widely prevalent in India. That may be about to change.
Prime Minister Narendra Modi is planning a new bill to curb “black money” that has inflated property prices, narrowed options for buyers like Sharma and kept homes beyond reach for many Indians.
Finance Minister Arun Jaitley told lawmakers recently he plans to introduce a revamped version of a lapsed Benami Transactions (Prohibition) Bill in the current session of parliament. Benami means anonymous, and such deals often involve concealing the identity of the true buyer or the seller.
“The first and foremost pillar of my tax proposals is to effectively deal with the problem of black money, which eats into the vitals of our economy and society,” Jaitley said. “This law will enable confiscation of benami property and provide for prosecution.” ‘Somebody will get caught’ The real estate industry accounts for a large share of illicit deals in India, with an estimated 30 per cent of transactions done with black money, according to data provided by Mumbai-based Liases Foras Real Estate Rating & Research.
If enacted, the law could mean a “healthy” correction to property prices, said Samir Arora, founder of Helios Capital Management, a Singapore-based hedge fund.
“The biggest beneficiary of black money in India is real estate,” Arora said. “The government looks all serious on this bill. Once you make the rules tough, somebody will get caught. When a few get caught, then others will freeze.”
For land deals, the cash component can range between 30 and 50 per cent of the deal value, said Pankaj Kapoor, founder of Liases Foras.
Politicians and businessmen hold a lot of land as they expect asset appreciation, Kapoor said.
“If black money goes away, property prices could see a sharp correction,” Kapoor predicted.
The proposed bill would prohibit accepting cash of 20,000 rupees ($400) and above for the purchase of immovable property, while buyers will have to provide their income tax identification numbers for property transactions exceeding 100,000 rupees.
“In principle, the more checks and balances they bring, the better for the industry,” said Rohit Gera, managing director of Pune-based Gera Developments. “Every time one talks of black money, it’s always linked to real estate. We are an easy play because of the perception we are a dirty industry.”
Gera, differentiating “reputed” builders from others, said his company accepts only cheques and never any cash. Targeting secret accounts The passage of the bill hinges on Modi’s ability to push it through the upper house of parliament, where his Bharatiya Janata Party lacks majority. In his first legislative victory since becoming prime minister in May, lawmakers recently approved a proposal pending since 2008 to raise the cap on foreign investment in local insurers.
The government’s efforts to tackle unaccounted wealth aren’t just confined to domestic black money. The cabinet recently approved the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, which will target citizens with secret overseas bank accounts.
India ranked third in the world for money illegally moved overseas in 2011, behind China and Russia, according to a 2013 report by Global Financial Integrity, a Washington-based group researching cross-border money transfers.
Modi’s promise to unearth black money was a key campaign pledge, helping him win the largest electoral mandate in three decades.
Weighted average apartment prices in Mumbai, the nation’s most expensive real estate market, have more than doubled since 2009 to 13,120 rupees a square foot, according to Liases Foras.
A three-bedroom apartment in Mumbai’s upscale Malabar Hill neighbourhood costs between 120 million rupees ($2.4 million) and 250 million rupees. The median price of apartments that changed hands in Manhattan last quarter was $980,000 (U.S.), up 15 per cent from a year earlier, according to a report by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.
As for Sharma’s search for a suitable property near New Delhi, he’s still searching.
“Property prices have become unaffordable in India, and with some developers asking for cash, its pricing people like me out of the market.”