Revision of circle rates may pump fresh energy into sluggish realty market

NEW DELHI: Developers and real estate experts have termed Haryana government’s decision to reduce circle rates by 15% as a “proactive” and “positive” step that will

NEW DELHI: Developers and real estate experts have termed Haryana government’s decision to reduce circle rates by 15% as a “proactive” and “positive” step that will pave the way for revival of the realty market.

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“The Haryana government’s decision to cut circle rate for the first time ever by 15% would act as a catalyst for revival of the real estate market. It is a particularly important move as it shows that the government has recognised the existence of a sluggish real estate market, which has seen prices being cut by developers seeking to push their sales,” says Manish Aggarwal, managing director, National Capital Region (NCR), Cushman & Wakefield, an international real estate consultant.

As per the estimates by Knight Frank India, the total unsold inventory in NCR stands at 1,89, 678 units of which Gurgaon accounts for nearly 24%. The reduction in circle rates will prove to be a win-win for both homebuyers waiting on the fence and for developers reeling under the weight of huge unsold inventory.

To cite an example, what this means is that for a property worth ` 75 lakh on which stamp duty is generally 7% to 8% (around ` 5 lakh), a 15% reduction in stamp duty will amount to savings of almost ` 75,000.

“The cut in circle rates would reduce the outgo on part of homebuyers and developers, and act as a catalyst for more property purchases. Homebuyers would now face reduced burden of stamp duty, registration charges and property taxes, which would propel especially those buyers who are on the fence. Since the circle rates cut applies to commercial properties too, developers are comforted with lower outgoings as stamp duty, fungible FSI (floor space index which is the ratio between the total built-up area and plot area) and Transfer of Development Rights (TDR) are determined by circle rates,” says Aggarwal.

Interestingly, circle rates have remained unchanged in Gurgaon for the last two years and despite that there were very few transactions happening in the market, largely due to the slump in the market and low sentiment. It was because of this reason that many developers were forced to offer composite prices (prices inclusive of parking and preferential location charges) to genuine buyers.

Circle rates reflect the prices in the micro market. More transactions in the market usually push up circle rates. The fact that the government has been forced to bring down the circle rates, sends out a signal that there is a correction in the market. It will also go a long way in reducing the margin of black money that exchanges hands during a real estate transaction, say experts.

“Going forward one can expect more sales, unsold inventory will come down and the pressure on developers will reduce as reduction in circle rates addresses the issue of afford ability for homebuyers,” says Samantak Das, chief economist and national director, Research, Knight Frank (India) Pvt Ltd, adding it will lead to rationalisation in prices in a market reeling under high inventory.

According to Anckur Srivasttava of GenReal Advisers, Haryana government’s decision shows that the government has kept an eye on the prices at which transactions have been happening over the years and the value at which properties are being registered. It has kept its finger on the pulse of the market and this should be emulated by other state governments. Governments should be realistic about their revenue earnings.

The Mamata Banerjee government in West Bengal reduced circle rates for the first time in January 2014. The slash was as steep as 33% in areas such as Park Street and 10.7% for properties along Ballygunge Circular Road.