The Black Money Myth : Part 3 : Real Estate !Big Fish is Through ?

Ok...Now that you have read my Part 1 and Part 2 of Black money myths ..(If not please read them on the same blog you or on ),let us discuss one more point which is always debated on whether the big fish who already have invested their money in real estate will face any pinch or it is only the commoner which will suffer who has to stand in line at the bank to exchange the demonetised currency  !Even in my own friend circle there are critics who feel that big black money sharks will not face any heat as "They don't keep notes at home " and "all money is in real estate already man ! " :-)

Let's understand how the black money is "invested" ( ! )  in real estate at the first place  .

1.When a builder launches a project,he has to first buy land from the landowner and this payment is depending on the city/locality normally is paid in 40 to 50 % cash.The agreement is still done at government ready reckoner rate and thus the black money is generated in the hands of the landowner.Now as I explained in part 1 ,this money is actually used by the landowner in economy to say buy gold for his daughter's marriage or buy some expensive clothes/white goods and so on.So the money was black,tax was not paid on it BUT it still got used in the economy somewhere in smaller denominations for REAL exchange of trade (Goods or services ) .So other than tax input ,this money came in circulation and economy could gain from it.

2.The builder also pays a bribe to local municipal officer and he also uses it to buy things for his family ( as explained in part 1 ..so not going in details ).Money STILL came in the economy as the government babu who accepted the bribe has no use of notes stashed at home if he can't spend them and get anything in return ( WHICH is THE CASE today with demonetised notes lying at their homes ;-) ) .But most of the money came in circulation and economy could gain from it..Interior decorators,wedding planners,travel companies,gold traders,tailors,electronic and white good manufacturers and so many guys got this money in their books and MAY  have already paid taxes on it thought it was given in cash to them by this babu !

Image Credit :Deccan Chronicle 

3.Now comes the third part of "big fish " and " bad guys" and "corrupt politicians " and so on :-) Now typically no black money shark invests in the property as completed units /flats as these transactions are still tracked by the way of property registration .So unless he finds a super close confidante proxy ( benami ) guy who has legitimate white income papers,he will not go in for registering Flat No. 402,sea facing with modular kitchen :-) These all are us middle class dreams to own a flat ..instead these "big guys" with "black" money strike a deal with the builder at a per square feet rate .So the selling rate is say INR 22,000/sq.feet ,this guys buys FSI of say 10,000 Sq.Feet @ Rs 6000/S    Q.Feet up front .

This is all paid in cash to the developer as "share holding" ( ! ) in the upcoming project.The developer uses this money again to buy building material,pay labour,do initial marketing expenses.So most money comes in the economy again .

4.Once the project is launched and middle class people like you and me go to purchase a flat,shady builder would ask us 30 -40 % component in black .He will do the agreement @ 12000 Rs /sq .feet with you and show that as his white income.Now he is left with extra Rs 10000 which he took in cash from you.The "bad guy" gets paid back Rs 8000 /SQ.Feet from this cash and builder keeps Rs 2000 as his cash income per sq.feet !

The "bad guy" makes cool 40 % return on his capital given in cash and builder generates black money as well.
5.Now please read carefully..the "skeptics" in you who say ,this "demonetisation" won't bring black money back as it is already "invested" in real estate...THINK how this "invested" money now can be made free again ?Because of the government regulations and tightening cash supply,all cash is in banks today .The majority of cash circulating in the market is waste paper ...So the "bad guy" who made 40 % returns in cash can't use it anymore....he is screwed..and even if he is not taken his money out yet from a project,he anyway can not "show" any asset in the upcoming project in his balance sheet as all transaction was in black.
So effectively the free cash is gone and now even if the builder wants to sell the asset to people like you and me who have white income,we will not be able to withdraw loads of cash anymore from our accounts in near future at least and won't be able to pay the builder.So he has to lower prices in the near term at least.

So with this brilliant move by government,even if you see common men and women suffering standing in serpentine lines in front of banks,make no mistake ..the "bad guys" "who already have blown up their money in real estate" / " who don't keep money at home..are they fools or what " are ALSO affected big time .

Unless our "cash" economy again generates enough Rs 2000 and Rs 500 notes in next 5-10 years,the "black" economy will be under severe pressure.With government announcing that the new high denomination notes will be in controlled supply mode,this becomes more difficult that we will again see same black market emerging again.