Forbes India 15th Anniversary Special

Black money crackdown will result in transparency in real estate deals

Organised and honest participants will command a huge advantage over their shadowy competitors

Published: Nov 10, 2016 07:36:22 PM IST
Updated: Nov 10, 2016 07:46:21 PM IST

Black money crackdown will result in transparency in real estate deals
Image: Jayanta Dey / Reuters

This move [to ban Rs 500 and Rs 1,000 currency notes], while proving to be a game changer for the Indian economy, will have far-reaching positive ramifications for the real estate sector. The industry has suffered at the hands of nefarious, unorganised and undisciplined players who have used the sector for laundering cash. With the "parallel economy" players being given a big blow, organised and honest real estate participants will now command a huge advantage over their shadowy competitors. More so, since primary sales of properties rarely had any cash component - developers usually relied on bank finance or private equity - the secondary market in many cases witnessed rampant cash components to save on the capital gains tax as well as stamp duty amounts. Now, with this masterstroke, albeit at the cost of some softening of rates, deals will be clear of any unaccountable transactions.

In the immediate aftermath, we can see a boom in low and mid-segment housing since prices will stabilise. Developers relying on "cash" to create artificial inflation will be given a run for their money. Going forward, increased spending on housing can be expected from the growing middle class if the government is successful in lowering housing loan interest rates on the backdrop of a strengthening economy. The overall transparency and curbing of corruption in the corridors of power means being able to deliver on time.

We will see a greater appetite of investors for participation in real estate through professionally managed fund houses and structured financial offerings as opposed to parking their monies in inventory. Secondary markets especially were a haven for black money transactions. This move will discourage such investments.

In general, the increased transparency can lead to a more digitised system of sales and purchase across the industry. This will enable greater outreach to the investors and developers alike. Coupled with the level-playing fields being created by GST, the increased spending through banking channels could mean a surge in users transacting online, across geographies to invest in real estate.

For institutional investors such as fund houses, the bone of contention has always been the deals done on the side by investee entities, thereby creating hurdles in realising better valuations and returns. With the "cash" transactions becoming non-existent in the near future, an era of consistency and transparency can be expected. This should lead to consistent returns and greater equity upsides while participating with second tier developers who have shunned corporate governance until now. Fund houses can now see increased demands and newer partners being available for deployment which in turn should translate to better returns. Structured equity deals may be the flavour of investing in the near future as market sentiments improve, especially in the mid-segment residential market.

(Rubi Arya is the Executive Vice Chairman of Milestone Capital Advisors)