Factor in property profiles before hiking circle rates
Blanket escalation in Delhi zones has led to a huge gap between circle and market rates
The move to increase circle rates in Delhi by 20% across the board last year will have an impact on investor sentiment in the Capital, especially on property sales. Circle rates are the government’s estimates of market values on which it bases all property taxes and duties. This practice of the government having to estimate market values of properties is unique in itself, being limited to a few emerging economies alone.
In an environment of opaque market activity — especially when a significant amount of unaccounted money is parked in real estate assets — such a move helps reduce money laundering and speculation in the sector, increasing the proportion of end-user homebuyers. In the long run, a reduced gap between circle and market rates works towards rationalising property prices; while higher tax revenue from realty transactions spells a wider availability of funds for infrastructure development.
Viewed from this perspective, the circle rate hike in the Capital may not have been an entirely negative development. The ground reality, however, is that the flat 20% hike has impacted residential real estate investments in the city, especially for areas where the circle rate exceeds the prevailing market rate by a significant margin. My view is that while we recognise the need and usefulness of a circle rate rise in the city, we also believe that it should have been commensurate with the property profiles of each zone instead of a blanket escalation. The final decision should have been made in consultation with the city’s town planning experts who are aware of the real estate nuances of each micro-market.
The downside of this decision from the Delhi government is that various localities that should have been included under category B (where rates have been hiked to ₹ 2.04 lakh/sq m) have been clubbed under category A (where circle rates stand at ₹ 7.74 lakh/sq m. The result is a nearly 300% gap between the circle rate and the market rate. Neighbourhoods that could have been placed under category A have been placed in category B, hence increasing the gap between going market rates and the circle rate — defeating the core purpose of this policy change.
This discrepancy has kept off homebuyers from investing in many of Delhi’s neighbourhoods, where circle rates have exceeded the going market rates, making investments unfeasible for small and mid-market players. Apart from paying higher stamp duties, homebuyers may also run the risk of coming under higher property tax implications as a result of this rise in circle rates.
While such a scenario may result in rationalising property prices in Delhi in the long term, it may also drive home buyers from the Capital into the neighboring real estate markets of Gurgaon and Noida.