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RE Sector Plagued By illicit Funding
March 26 2011 , 06:03 PM   #1
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RE Sector Plagued By illicit Funding

Developers point out that black money in real estate is a factor that is plaguing old properties and not so much on the new developments. "The old property regime is forcing its inheritance on the new development regime. To illustrate, when a property is sold in the heart of south Delhi, the black component forces its way first in comparison to the new development regime say in Noida or Greater Noida," says Vigneshwara Developers managing director Sunil Dahiya.
JLL's Puri adds that dealings in illicit funds in the sector are primarily in the unorganized market. "Black money deals are more common on the unorganised market, but even this is on the decrease with greater awareness on the part of buyers. Yes, there are still loopholes to be filled, but the caricatured version of black money driving Indian real estate is no longer applicable," he says.

Developers also point out that the real estate industry was synonymous with black money in India earlier. But, they say, the scenario has changed dramatically with the growth of various innovative funding options and the change in buyer profile. "The main driver of the primary real estate market is the first time home buyer who has good salary package and is completely dependent on the home loan. The existence of black money is mostly in secondary market deals where the prices have sky-rocketed and main contributors to the black money are now politicians and government servants who find real estate the best option to hide their illicit wealth. Businessmen nowadays have better access to funds," says SG Estates director Gaurav Gupta.


The Prime Minister also admitted that stamp duties were a "big obstacle to cleaning the mess with regard to transactions in real estate". In his speech he said, "(reduction in stamp duty) is one way in which we can work towards a system whereby black money would be less of a menace in transactions relating to real estate." Stamp duty is a property tax, to be paid in almost every deal at a prescribed rate on the transaction value or calculations based on circle rate, whichever is higher. It, however, varies from state to state.

The tax varies from around 4 per cent in Mumbai to about 13 per cent in Kerala. Haryana charges 6 per cent as stamp duty on properties, while it is 8 per cent in Uttar Pradesh. Most of the states charge around 6-8 per cent. Industry players have been asking to reduce stamp duty for a long time, terming it an unfavourable levy on the way to offer affordable housing to consumers. At present, stamp duty is charged from both consumers and developers.

Reducing the stamp duty is surely a welcome step and will give an impetus to decision making of the first time buyer to go in for his first acquisition. "A lot of properties in the metros are going for reconstruction, that too under the owner-builder collaboration model, therefore this will surely bring the burden down for the first time buyers and those interested in reconstruction. If the Prime Minister may again consider completely exempting an existing owner from paying stamp duty on his reconstructed house, it would benefit a lot of senior citizens and give impetus to regeneration of old properties into new," says Vigneshwara's Dahiya.

While stamp duty has reduced from earlier levels, "there is still room for more reduction to encourage people to pay 100 per cent by cheque", says SG Estates' Gupta.

While developers admit the need for transparency, they are quick to point out that improved funding has stemmed flow of black money

Not many were taken aback by the Prime Minister's speech when he spoke of the existence of black money in the real estate sector. Only a few home-seekers and fewer developers would have raised an eyebrow when Manmohan Singh said: "I think as far as black money in real estate is concerned, unfortunately that is a reality and one way out of this would be to lower stamp duties."

In fact, soon after Singh's statement, developers came out and admitted that the sector was plagued by illicit funding. Tata Housing Company managing director and chief executive Brotin Banerjee, reacting to the Prime Minister's call for a reduction in stamp duty, said, "Whatever the Prime Minister has said is absolutely true. There has been rampant use of black money in the real estate sector. I think, this is a welcome move and will help the sector."


The real estate sector also topped the list of industries perceived to be the most corrupt in India in a survey conducted by global consultancy firm KPMG. Nearly half of the respondents in the survey are of the view that the sector is most prone to corruption because government and political intervention is considered higher, KPMG stated. Large capital investments, multi-level approvals, complex processes and huge projects give immense opportunity for corruption, the survey said.

"Stricter measures against black money can certainly help bring about greater transparency, give the Indian real estate sector more credibility and make it more attractive for foreign investors. That said, it would be wrong to say that measures against corruption are not being taken. While the recent scams that have plagued the sector of late did put the spotlight on some serious regulatory lacunae, the fact is that more and more developers are now offering completely transparent deals," says Anuj Puri, chairman and country head at Jones Lang LaSalle India.

Source: The Indian Express
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