Changed cir­cle rates to im­pact buy­ers?

HT Estates - - FRONT PAGE - Vat­sala Ka­mat vat­ Ash­wini Ku­mar Sharma ash­

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.


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.


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.


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.


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

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