Buying homes: there are still some shades of grey

Buying homes: there are still some shades of grey

Mumbai: A few weeks ago, Abha Gupta, an editor with the Zee Group, went house-hunting in Mumbai. The 34-year-old wanted to buy a one-bedroom flat and was willing to spend around Rs30-35 lakh on it. Much of it would have come out of a mortgage. But Gupta had not accounted for the amount she would have to pay in cash—the “black money" component as it is popularly referred to in India. Black money is money that isn’t accounted for; a builder or developer who asks for some part of the amount to be paid in cash does not disclose this while declaring income.

Almost all large builders and developers claim that all their transactions are “cheque", meaning that all money is accounted for.

“As far as I know, none of the big, reputable developers deal in cash any more. They cannot afford to, with the income-tax authorities watching the sector so closely," says Mufotraj Munot, chairman of Kalpataru Properties Ltd, one of Mumbai’s largest residential developers. “But we cannot stop individual investors from taking a cash component."

“We have seen a lot of this all over the country a few years ago. But now, as the market is maturing, and more builders are getting in foreign equity or raising money from the markets, such transactions are coming down. In another three to five years, as the market matures across all the tier I and tier II cities, such transactions will die out," says Anuj Puri, chairman, Jones Lang LaSalle Meghraj, a real estate consulting firm.

And even if developers and builders move to an “all cheque" payment system, cash is unlikely to disappear from the secondary market—where people who have bought houses sell them to other buyers, typically after there has been a significant appreciation in prices.

In Gupta’s case, the seller wanted 40% of the money to be paid in cash. For a Rs35-lakh flat, that worked out to Rs14 lakh. “I really have no choice but to shelve my plans of buying a house for now, although the broker offered to bring it (the cash component) down to 30%. Where will a salaried person like me bring that kind of money? And moreover, why should I pay in black when all my money is legal?" she asks.

Sanjeev Srivastav, a chemical engineer from New Delhi, has decided to go ahead and do just this. He is borrowing money from family and friends to make up the cash component. “I don’t think that the (ratio of the) black and white component will change in the foreseeable future. If you want a house, pay up!" says Srivastav, who will pay around 40% of the cost of his 1,200 sq. ft flat in the Delhi suburb of Gurgaon in cash. He refuses to reveal how much he will actually fork out as cash.

Gupta is part of a growing tribe of end users who are finding homes going out of their reach as the cash component grows even as real estate rates increase. “I want to buy a house in Chennai, but I cannot as prices have shot up and along with it, the black money component," says Maasilamani Shanker, a sales professional from Hyderabad, who wants to move to Chennai.

In cities such as Hyderabad, Mumbai and New Delhi, the cash:cheque ratio can be as high as 50:50. “Most of the people here don’t want to pay stamp duty and registration on the property they buy or tax on the income from the sale of a property. So, most of the time, only 50% of the transaction cost is reported," says Ramesh Reddy, a Hyderabad-based real estate broker. Reddy himself reported only 50% of the transaction cost on his 1,700 sq. ft house.

In Chennai and Bangalore, the ratio is lower at 30:70 and 20:80, respectively.

The reason, according to Kumar Gera, chairman of the Confederation of Real Estate Developers’ Associations of India, an industry body, is the higher concentration of salaried people compared with businessmen in these cities (salaried people usually cannot pay cash because all their money is accounted for). New Delhi and Mumbai have the highest cash component in real estate deals, says Gera. Some cities in Punjab such as Chandigarh, Amritsar and Jalandhar also have high cash-component deals, he adds.

Because its residents are largely salaried people, Pune sees very few cash deals, says Gera. “Most of the transactions in the city are cheque payments. When most of your consumers cannot pay cash, the builders build accordingly," adds Gera, whose firm, Gera Developers Ltd, develops and sells properties in Pune.

In recent months, says Gera, Pune has seen the largest number of real estate fund deals. This is another pointer to the fact that city has fewer “black money" deals, he says.

Both Gupta in Mumbai and Srivastav in Delhi were looking at “investor flats". These are flats belonging to investors who paid the builder cash at the pre-building stage and bought the flats at a discount. Typically, builders who don’t have credit lines with banks take money from investors to kick-start their projects. These investors sell the flats once the building is ready (or all flats in it are sold out and there is demand for more) by which time the price is also likely to have appreciated, given the shortage of quality housing in the country.

Such sellers are usually upfront about their demands, although some do refer to the “black money" component as “premiums in cash". Even some listings mention the cash component: the listing for a villa in Gurgaon on Craigslist, a classifieds site that operates in several cities around the world including New Delhi and Bangalore, says that “payment in all white can be made; however, the buyer will have to bear the cost of tax arising from a full white transaction."

However, over the past few years, banks have made more credit available to real estate developers and the cash component in most deals saw a reduction. Now, with the Reserve Bank of India asking banks to cut their exposure to the sector, the cash component has become significant again, say analysts who do not wish to be identified. The analysts add that the shortage of housing in Mumbai and New Delhi has only exacerbated the situation.

“There are very few investors who will take full cheque payments, even if you are willing to pay them a premium," says Gupta’s broker, Jayesh Patel of Saraswathi Estate Consultants. “And the premium can range anywhere from Rs100-200 a sq. ft, pushing up the cost of a 1,000 sq. ft flat by as much as Rs1-2 lakh". Patel adds that the biggest reason for the revival of “black money" deals is the rapid rise in real estate rates. “People are seeing so much appreciation in their property values that they are tempted to sell but most don’t want to pay tax on the income from the sale. So, cash deals are back in vogue."

“The only way to curb these deals is to regulate the industry so tightly that every deal has to be reported. Also, once the Real Estate Investment Trusts (REITs) come in and the market achieves a certain level of liquidity, the need for cash deals would peter out on its own," says the manager of a real estate fund, who did not wish to be identified.

Meanwhile, rather than try and pay cash, Abha Gupta has decided she will wait till she can buy a flat in an “all-cheque" transaction.