RERA and GST; Impact on the Real Estate Sector; A boon or a bane?
How is the real estate market now, especially from a home-buyer’s perspective?
Too many things are happening in the real estate sector. The new regulator has come in, tax regime has changed and property market has also been witnessing a slow down for the last few years.
Home-buyers who are looking to buy under-construction or new-launch properties, usually think whether to buy now or wait. My sense is that home buying is a very long journey where you have to go out, see the projects, do a cost-benefit analysis of different options and only then decide which option to choose. I think you should go ahead and search the property once you have decided to buy it. The main thing you need to see is that whether the property is registered under the Real Estate (Regulation and Development) Act, 2016 (RERA) or not. If it is registered, then there is no confusion because all its details are transparent to the buyer. If it is not, then you should hold back till the property gets registered.
Goods and Services Tax (GST) is already live in the country. So now you have a clear transparent mechanism of knowing what cost you’ll be incurring on a property and you can negotiate on that. Overall, this is a very good time because RERA is being implemented in multiple states and GST is also here. So, you have no confusion going forward.
It is very clear that prices are not going to correct, especially the cost of ownership of property. Because of GST there might be some correction in prices, but that will be taken care of by the additional tax that government has put. Prices have already bottomed-out and in last 3 years we have not seen any price appreciation, or just to the extent of 2-3%. There is no scope for a developer to reduce prices. It can only go up; or stay where it is, but I doubt that. I think that developers need to increase the prices if they want to really complete the projects because RERA has increased the cost of compliance.
So, the good time—in terms of cost of buying a property—is now, or it may have already passed, to be honest. Going forward, you will see price increases and you have to start believing that now things are only going to be costlier, it cannot get cheaper.
RERA will help home-buyers in the buying decision?
RERA brings peace of mind for home-buyers. Till now, potential buyers of under-construction, new launches and pre-launch properties had some big questions in their mind, such as: how do they know that they have been given correct information, and will the project be delivered on time? When customers come to us, their first question is: “Is this builder trustworthy?” Now I don’t see such questions coming, because everything is transparent. If that builder is registered, his details are available on RERA’s website and it will deliver as per those specifications.
Goods and Services Tax (GST) is already live in the country. So now you have a clear transparent mechanism of knowing what cost you’ll be incurring on a property and you can negotiate on that. Overall, this is a very good time because RERA is being implemented in multiple states and GST is also here. So, you have no confusion going forward.
Will RERA help home-buyers in the buying decision?
RERA brings peace of mind for homebuyers. Till now, potential buyers of under-construction, new launches and pre-launch properties had some big questions in their mind, such as: how do they know that they have been given correct information, and will the project be delivered on time? When customers come to us, their first question is: “Is this builder trustworthy?” Now I don’t see such questions coming, because everything is transparent. If that builder is registered, his details are available on RERA’s website and it will deliver as per those specifications.
That way, a lot of tension associated with the buying process has gone. Obviously, you have to go through the process of selecting a property, and that will continue. You will also have to negotiate on the price. So those things stay.
How has GST impacted, or will impact, real estate prices?
GST is a very complicated topic. So let me start with an ideal scenario. Till now, the developers who were selling or constructing properties, they were buying lots of material and services and paying taxes on them. Unfortunately, they did not get credit for any taxes they paid, while selling the property to end users. So, earlier in most of the states, the tax was in the range of 4.5% and 5.5%. With GST, it is suddenly 12%. It may seem that, as a result, the cost of owning a property will increase for the end user.
However, because of the input tax credit coming into play, the developer should be able to reduce the selling price. But that’s an ideal scenario. To be honest, if you want to really see this ideal scenario, I think it will be mostly for new launches. Here we will see the listed prices to be lesser than what they used to be. They get the benefit of input tax credit and should be able to pass on those benefits.
But the reality is that we have different kinds of projects. All kinds of projects are at different stages of construction. So that puts us in a very complicated and confused state right now in terms of how much benefit a developer would be able to pass on.
Take the example of Mumbai, where prices are above Rs10,000 per sq. There the problem is that cost of land is much higher than the cost of construction. So the input tax credit that a developer would be able to get would be lesser. In such markets, we expect the prices to increase.
I have discussed with a few developers and my sense is that while they can reduce price by 2% to 3%, it may still not bring down the prices, because, the tax on property is up from 5.5% to 12%. Even if they give 3% discount, still there will be a 3.5% increase in prices in Mumbai or even the central business district (CBD) areas of cities like Delhi and Bengaluru, where properties are in the range of Rs7,000 and Rs10,000 per sq. ft. You will see the prices increase here. However, properties below Rs4,000 or Rs5,000 per sq. ft will obviously have a much better price structure, given that they can benefit a lot from input tax credit. But properties in the higher range will have higher prices going forward.
I think the biggest question mark is for those buyers who had booked under construction properties by paying 20% to 30% of the price. They too need to benefit from reduction in prices. However, till now we have not seen any developer taking the initiative of reducing prices for these customers. Whereas for new buyers, a lot of developers have already started giving discounts.
This thing will take time. Overall, we have to wait for some months before things stabilise. But the good thing is that there are lots of developers for new home-buyers to choose from. These developers are giving discounts—to at least make the prices GST-neutral for customers.