The recently released ‘White Paper on Black Money’ by the Union government says that real estate is the highest contributor to the total black money being generated in the country. This ‘black money rolling’ percentage within the sector is much higher at around 30 per cent depending on the parties involved and the kind of transaction. It has become a vicious cycle and the hapless buyer is the ultimate victim.
“Real estate is plagued with black money and this has led to an unequal playing field among buyers and is tilted against the salaried class,” says Pravin Malkani, managing director of Patel Realty, a Mumbai-based firm.
THE NEW GOLD RUSH
The reason is simple: super-normal profits. If one compares the appreciation in the rates of shares, gold and real estate in the last decade, then real estate has on an average yielded almost 300 per cent appreciation of investment across all major markets in the country.
Very high demand against very low supply coupled with attractive interest rates for home loans in the beginning of the last decade boosted high appreciation. In addition, lack of stringent laws and a regulator for the sector, made it a haven for parking unaccounted money. Real estate had two benefits: high profits in a short span of time and an easy route to laundering black money.
The initial entrants invested black money generated from other businesses. Some stayed on to become developers and many others entered the fray as investors and promoters.
A significant source of black money in the sector comes from investors. They could be businessmen, politicians, mafia lords, NRIs and in some cases even celebrities. These ‘investors’ bankroll developers even before the project takes off, thereby giving the developer sufficient funds with which to launch the project.
There is a difference though, between these investors and financiers. The latter finance a project on the basis of an agreement with the developer. Investors, on the other hand, do not have a registered document, but an understanding on paper for the arrangement of the funds. Financiers charge a fixed interest rate while investors take a proportion of the profits