Changed circle rates to impact buyers?
On 1 May, it will be a year since the Real Estate (Regulation & Development) Act was enforced to resolve the problems of the languishing residential property market. But there is little reason for optimism.
Developers are saddled with unsold inventory, several ongoing projects are stuck for want of funds, new launches are low-key and stranded homebuyers are still looking for a solution.
According to Anarock Property Consultants Pvt. Ltd (formerly JLL India), the pace of launches in the March quarter was 17.5% slower than the yearago period and only around a third of what it was two years back. The confidence in the sector, be it from the viewpoint of a developer, agent or customer is still low.
One reason is that the implementation of RERA by the states has been patchy.
Maharashtra and Karnataka got it off the ground quickly and even have full-blown websites with a redressal mechanism in place. However, others still do not have the system in place.
Although some states have spelt out penalties, we hardly hear of customers being compensated.
The bigger problem is the unwillingness of financial institutions to support stranded projects.
According to KotakSecurities Research, “our channel checks suggest slower pace of re-financing from non-banking finance companies (NBFCs), during a seasonally strong quarter for lending.”
That RERA registration is mandatory for new projects seeking finance extends the time taken for new launches too.
Right now, it is a catch-22 situation, where buyers are cautious, deferring purchases until the return of better times and developers are stuck for want of finances. So, while there may be a slight improvement in sales over the December quarter in a few regions such as Mumbai Metropolitan Region (MMR) and Bengaluru, it is too early to call it a revival.
After all, the unsold inventory, according to Anarock across seven key cities as at endMarch, was 711,127 units, with MMR and National Capital Region (NCR) holding morethan half.
Meanwhile, even large realty firms in the listed universe are knowntobeoffering discounts to rid themselves of unsold inventory in order to generate cash flows.
Costs of compliance are high apart from the fact that developers are not allowed to market any housing project until clearances and the registration is completed with RERA.
The struggle is far from over for firms with high exposure to the high-end housing segment. Indeed, RERA aims to bring about greater transparency in the sector and curb the proliferation of fly-by-night operators. But perhaps it needs more teeth at the central level to hasten the process of recovery. If you are planning to buy a house in Gurgaon, you may first need to assess a critical criteria. Recently, the Haryana government raised circle rates in Gurgaon. Typically, when circle rates are raised, the marketrates in the area also rise proportionately. But will that happen even now when the real estate market is floundering?
Circle rates are reviewed by eachstate governmentfromtime to time.
Effective 9 April 2018, circle rates in Gurgaon were increased by up to 20%, barely two months after the rates were raised on 12 February by 10-15%. The Maharashtra government also reviewed the circle rate (known as ready reckoner rate in the state) in April for FY2018-19; it was kept unchanged though.
We tell you how a rise in circle rates canaffect your buying decision, and what are the implications of such a hike.
WHAT IS CIRCLE RATE?
Circle rate is the minimum price fixed by the state government at which a property needs to be registered when bought or trans- ferred.
A property has to be registered either on the actual transaction value or the minimum rate, i.e. circle rate, set by the government, whichever is higher, after paying stamp duty and registration charges.
In rare cases, wheretheactual price is less than the circle rate, the property is registered at circle rate.
HOW WILL IT AFFECT PROPERTY PRICES?
In case of bullish markets, where demand is higher than supply, typically property prices rise after an increase in circle rate, as sellers want to pass on the extra burden on buyers.
However, in the current bearish real estate market, where supply is higher than demand and buyers are not willing to shell out even the current price, it would be difficult to raise prices on the pretext of higher circle rate.
“It is evident that effective property prices have come down in Gurgaon over the period. Government must be having other objectives, but the increase is certainly not as per market dynamics,” said Samantak Das, chief economist & national director – research, Knight Frank India, a real estate consultant.
Property prices are determinedbasedondemandandsupply,which is not reflected in the revision of circle rates,” said Samir Jasuja, founder and chief executive officer, PropEquity, a Gurgaon-based real estate data, research and analytics firm.
THE IMPACT ON BUYERS
Over the past few decades, while property prices kept rising, circle rates were revised only occasionally, creating a gap between the actual market price and the declared value.
This spawned a cycle of transactions in unaccounted money. People would register a property at the circle rate or declared value, and use the gap with actual market price to offload unaccounted money. The gap had its benefits too as the buyer had to pay less stamp duty, and the seller was able to hide her actual capital gains, and save tax.
INCREASING THE CIRCLE RATE CAN REDUCE THIS GAP.
For salaried individuals, buying a home will become easier as the share of unaccounted money reduces. Often, salaried individuals depend on a home loan to buy a house, and are unable to make huge cash payments. For instance, if an person can afford a home loan of Rs50 lakh for a house priced at Rs60 lakh, but the declared value is only Rs30 lakh, she will get a loan of only, say, Rs25 lakh.
Shemaynotbeabletoarrange the balance Rs35 lakh in cash. If she were to get a loan of Rs50 lakh, the cash amount she would have had to arrange would be only Rs10 lakh.
Increase in circle rate at this juncture may not impact property prices, as prices are governed by market forces— demand and supply—and the demand is low at present.
Developers might use the opportunity to say that prices will increase but that’s unlikely to happen. “Property prices are not expected to go up in next 1-2 years,” said Jasuja. Das agreed, “Any significant price rise can be ruled out for at least a year.”
If you are planning to buy a house, don’t let an increase in circle rate scare you away. Unless developers get rid of their inventory, any price rise is unlikely in the near future.
Developers are saddled with unsold inventory as several ongoing projects are stuck