RBI's currency exchange drive may fuel land deals but not property prices

The Reserve Bank of India’s move to withdraw currency notes printed before 2005 has triggered panic among people holding liquid cash.The general fear is that black money with businessmen, politicians and other elements beyond the pale of the law may chase real assets such as gold and real estate ahead of polls. While the RBI has made it clear that anybody can walk into a bank and exchange pre-2005 currency notes until 1 July without any proof of income, people fear it could set the Income Tax department after them.

But the central bank’s move is unlikely to have a significant impact on India’s real estate market for the simple reasons that sellers may not want to transact in the pre-2005 currency series as they may find it difficult to convert these notes to new ones.

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However, industry experts do expect a spurt in agricultural land deals as those holding unaccounted wealth can quickly convert cash into land.

“Where land holdings are small, farmers can always show the money as income from agricultural land in order to avoid tax. But any complicated land deals cannot occur because three months is a very short period of time for such deals to go through,“said Aniruddh Walal, MD, Occupier Services-West, DTZ India.

When it comes to land, as much as 50-60 percent is paid in cash. And with elections round the corner, builders are in dire need of liquid funds. “In land, there is always scope for absorbing black money. Between now and April 1, you will see the number of land transactions rising. But in the long term, the RBI move is good as it will flush out the unaccounted wealth. Not too many deals can take place in a span of three months and not too many sellers will be willing to accept old notes,” said Panjak Kapoor, MD at real estate consulting firm Liases Foras.

Kapoor believes apart from the National Capital Region (NCR), non-metros where cash component is high for realty deals may see a spike in prices but cities such as Mumbai where the cash component is the difference between the ready reckoner rate and the market rate will not see much of an impact.

An industry expert, who did not wish to be named, however, pointed out that the reason why prices will not spike is because more often than not real estate is just a means of doing a hawala transaction. “The money is not even parked here. But moved to another entity abroad through a real estate transaction. And right now it is the perfect opportunity to use this investment vehicle to convert black into white,” he said.

[caption id=“attachment_74221” align=“alignleft” width=“380”]  And given that properties worth millions are sold at below market rates to generate sufficient cash for elections, there is an increase in distress sale activity in real estate. So a spike in prices, at least till the elections are over, can be ruled out. Image courtesy: Thinkstock[/caption]

And given thatproperties worth millions are sold at below market rates to generate sufficient cash for elections, there is an increase in distress sale activity in real estate. So a spike in prices, at least till the elections are over, can be ruled out.

“This is especially true in the high-end market where prices of luxury apartments are being sold at a high discount right now. This market caters to the corporates, the ultra-high-net-worth individuals. If he is reselling his apartment, he won’t want cash that will not be valid after three months,” added Wahal.

He also noted that much of the panic is uncalled for those who made their wealth during the 1990s have already absorbed their unaccounted wealth and the next big boom only took place post 2003 and that currency will remain valid even today.

What this means is that gone are the days when people hid crores under their mattresses. Those with over Rs 100 crore have laundered their money already. Most of the biggest chunks of black money have already been converted to “white”. How? A - hawala transaction will convert rupees to dollars and send the money out of the country. Then through a web of companies in tax havens like Switzerland and Mauritius, the money comes back into India as equity or “convertible debt” into an Indian company, which is soon written off.

Whether the RBI move will really impact currency hoarders remains to be seen but one factor that all analysts were unanimous on was that in all likelihood the RBI will extend its deadline under pressure from political parties.