• Unaccounted wealth still used in the resale market across the country; Govt’s battle against it continues
• Primary sales market in Tier 1 cities offers limited scope for 'black' money transactions; Tier 2 & 3 cities present a different picture
• Reducing gap between market value and circle rates in Tier 1 cities limits scope for black money in primary housing sales market
• However, in many tier 2 & 3 cities, circle rates are much lower than existing market rates

Even three years after DeMo – India’s surgical strike against black money - up to 30% of the total transaction value on the secondary (resale) residential market across India can still be paid in cash. The primary sales market in Tier 1 cities offers the least scope for unaccounted wealth in property deals.

Anuj Puri, Chairman - ANAROCK Property Consultants says, "The primary sales market in tier 1 cities offers limited scope for black money because of the smaller gap between the state-notified circle rates and the market value quoted by developer. In fact, in some markets in NCR, the circle rates are higher than the market value of properties."

For instance, at MG Road in Gurugram the average circle rate is approx. INR 11,205 per sq. ft. while the average market value is less at nearly INR 11,000 per sq. ft. Likewise, in DLF City Phase 4, the average circle rates and market value are almost at par which is approx. INR 10,830 per sq. ft. and INR 10,800 per sq. ft. 

Circle rates, guidance value or ready reckoner rates are the minimum values set by a state government below which a property cannot be registered.

“Demonetization in November 2016 sent Indian residential real estate – till then a preferred laundromat for unaccounted wealth - into an almost terminal tailspin," says Anuj Puri. "Even three years after DeMo, the battle is only half-won. The secondary or resale residential real estate market still accommodates black money; at least 30% of the total cost of resale property can still be paid in cash. While more and more buyers and sellers prefer official payment routes as a matter of principle, many still use the resale property market to launder untaxed cash.”

While the trend in MMR and NCR – cities historically notorious for black money in real estate - has tamed considerably in primary sales, their resale property markets still see cash components. As much as 20-25% of the total resale property cost can still be 'adjusted' with black money. In cities like Bangalore, Pune and Hyderabad, the prevalence of transparent payment routes, even on the resale market, is much higher.

Unlike the primary sales market, the resale market still lacks strict regulations, making it easier for buyers and sellers to use cash components. Also, the primary sales market involves developers with a reputation to protect - a resale property transaction involves two individuals. The pricing of resale properties also lacks transparency.

In the case of direct sales by developers, there are readily-available pricing benchmarks. In the secondary sales market, a seller can inflate the price of a property based on location, added features, etc. without stating so on the books.

Primary Sales in Tier 1 Cities Almost Cashless

The reduced gap between market values and circle rates in Tier 1 cities have significantly reduced the scope for cash components in primary housing sales. For instance, the average ready reckoner rate for housing in Mumbai's Lower Parel is approx. INR 32,604/sq.ft. while the average market value is INR 34,750/sq.ft. In Worli, another high-profile area in the financial capital, the average RR rate is INR 35,320/sq.ft. while the average market value of is INR 38,520/sq.ft. This narrow gap offers little scope cash components.

Another factor at play is the massive decline of speculative buying and selling of residential properties. Genuine buyers purchasing homes for self-use invariably use home loans to ease the financial impact and avail of various tax benefits. Banks and HFCs do a fairly close due diligence of every proposal, reducing the scope for price manipulation.

Nevertheless, both the primary sale and resale property markets of many Tier 2 & 3 cities still offer leeway for cash components. The incidence is higher in cities and areas where market rates have overtaken circle rates.

For instance, the average circle rate at Tonk Road in Jaipur is approx. INR 5,200/sq.ft. whereas the average market price is above INR 6,800 per sq. ft.