Delhi property circle rate cut: How much will real estate prices reduce and other questions answered

The Delhi government has decided to reduce circle rates in the capital across categories— residential, commercial and retail—for six months as part of its efforts to provide relief to the real estate sector reeling under the impact of COVID-19 pandemic.

Real estate experts said the move is expected to improve market sentiment and increase property transaction volumes. The reduction of 20 percent in circle rates is expected to reduce stamp duty or registration charges by 1 percent. Below is an attempt to answer all the vital questions on the matter.

What has happened?

The Delhi government on February 5 decided to slash circle rates for residential, commercial, and industrial properties in Delhi by 20 percent flat until September 30, 2021. The decision was taken at a cabinet meeting chaired by Chief Minister (CM) Arvind Kejriwal.

Kejriwal hoped that the step will help in giving a boost to the economy post the COVID-19 pandemic. "While we are slowly recovering from the economic contraction in the post-COVID era, it is the duty of our government to take all steps to further reduce the financial burden on the common man," he said.

The decision is expected to make it "substantially cheaper" for people to do property transactions, revive the real estate sector which has been hit severely by the coronavirus pandemic and create new jobs, he said.

How will it impact property transactions in Delhi?

Real estate experts said the move may also lead to an increase in property transactions, especially in Grade A micro-markets, where there is a circle rate and market rate mismatch. Also, sellers in these areas were unable to reduce prices as it attracted a penalty from the income tax department.

“It is a very proactive step. Will certainly improve market sentiment and increase transaction volumes,” said Anckur Srivasttava of GenReal Advisers.

It will also help sellers in localities such as New Friends Colony, Friends Colony, Maharani Bagh, Vasant Vihar, Anand Niketan where the market rate is lower than the circle rate.

“This is a long-awaited decision and is a huge relief for large number of property owners who were not able to sell their properties due to market rate being significantly lesser than circle rate. This move will enable all such property owners to transact and distribute sale proceeds to their next generation. Supply of such assets may increase the overall inventory but there’s enough pent up demand to absorb the same,” said Amit Goel, CEO at India Sotheby’s International Realty.

The move is also expected to lead to enhanced buying and selling activity in the Capital.

“This step will propel buying and selling activity, especially in a few grade-A category micro markets which otherwise have been suffering due to the circle and market-rate mismatch. A move of this nature will also enable owners of large assets to mobilise transactions which otherwise were challenging given the size and consequent values,” said Shveta Jain, Managing Director, Residential Services, Savills India.

Will it lead to reduction in property prices?

While some experts say the move may lead to reduction in prices, others say that is unlikely.

Experts said the decision is likely to bring down the cost of property transactions, especially the mid and the luxury segment.

There is a mismatch between the market price and circle rates mainly in the premium segment. Right now in some premium markets the market rate is lower than the circle rate. Now developers will have the elbow room to bring down the price also because circle rate was a limiting factor earlier.

“However, more than price reduction fence sitters in that segment will go ahead because they will have that confidence that they can convince the developer of reduction in price. This correction will reflect the market dynamics,” says Samantak Das, Chief Economist and Head of Research, JLL India.

Circle rate should reflect the market rate. Earlier, the buyer had to pay a higher stamp duty than the value of the house which led to negative sentiment. Now the total price will come down because the stamp duty registration will get reduced to that extent. Instead of paying stamp duty on a base rate of Rs 10 crore, a buyer may now have to pay stamp duty on Rs 8 crore.

Mani Rangrajan, the Group COO o Housing.com, Makaan.com and Proptiger.com, said: "A reduction in circle rates not only will soften property and land prices in Delhi but also put pressure on other adjoining realty markets of NCR. This will bring in a new set of buyers to the market."

"Reducing circle rates, even for only a limited period, is great news for the Delhi housing market because it helps to further bring down property prices, which are very high despite not having risen for quite a long time," Anuj Puri, Chairman- ANAROCK Property Consultants said.

But Amit Goel, CEO at India Sotheby's International Realty, said he does not anticipate price reduction.

“With huge pent-up demand from 2020 and all time low interest rates, prices “particularly for residential properties” should rather go up or remain stable. I also believe, HNIs who've made money in the buoyant stock market, will now look at upgrading or buying real estate taking advantage of this 6 months window,” Goel said.

What are circle rates and stamp duty rates?

Circle rate, or ready reckoner rate, is the minimum price at which the property sale is registered. This rate is determined by the state government and is generally reviewed to ensure that they are in line with the market rate. In the event of a property being bought or sold, the stamp duty and the registration charges are calculated basis the circle rate or the actual value of the property, whichever is higher.

In Delhi, stamp duty varies between 4 percent and 6 percent of the transaction value, while the registration fee is 1 percent of the transaction value. It is 6 percent if purchasers are men and 4 percent for women buyers.

To cite a simple example, if the size of a plot is 300 sq yards and the circle rate of an area is Rs 10,000 per sq yard and the stamp duty is 6 percent, the stamp duty will be Rs 1,80,000.

Rs 30 lakh is the value of the land and 6 percent is Rs 1.8 lakh but there is a reduction in circle rate come down to Rs 8,000 per sq yard. Valuation as per circle rate will be Rs 24 lakh not Rs 30 lakh and on that the stamp duty payment will be Rs 1,44,000.

In Delhi, properties have been divided into eight categories – A to H, the former being the most expensive and the latter being the least expensive. A category localities generally command a circle rate of Rs 7,74,000 lakh per sq m which will now be down to Rs 6,19,200 per sq m under the proposed rate cut and an H category commands a circle rate of around Rs 23,280 per sq m which will now be down to Rs 18,624 per sq m under the proposal.

Earlier, Finance Minister Nirmala Sitharaman allowed homebuyers to buy homes at 20 percent lower value than the circle rates. This new norm will be applicable to properties priced below Rs 2 crore, until June 30, 2021.

Should the government be reducing stamp duty instead of circle rates?

Experts said the impact of reduction in circle rates will surely impact the stamp duty rate. Once the circle rates are reduced, the overall amount to be paid as stamp duty gets reduced.

To boost the stagnant real estate market hit by COVID-19, the Maharashtra government on August 26, 2020 decided to temporarily reduce stamp duty on housing units from 5 percent to 2 percent until December 31, 2020.

Stamp duty from January 1, 2021, until March 31, 2021, will be 3 percent, they said. The decision was taken at the state cabinet meeting on August 26.

In November 2020, the Karnataka government slashed the stamp duty on houses costing less than Rs 20 lakh to 3 percent from 5 percent.

In case of Delhi, the circle rate reduction is for six months which means that the buyers will now take quick decisions because it is six month window.

“This is another way of addressing the issue of overall home price rationalization because Delhi government will forego income because earlier the stamp duty was being paid on a higher rate. Now it will be 20% reduced and the state government will have to forego tax income to that extent but then it will lead to increase in volume of sales which perhaps may outweigh the loss to the state government and nullify the likely negative impact. Overall, the move will augur well for the property market,” said Das.

Which real estate sector—residential or commercial— will benefit more?

“Just like Mumbai real estate has embarked on the recovery path from December 20, this could define the path to Delhi real estate recovery. Since this is only for Delhi, we see residential real estate benefiting more than commercial/ retail or industrial,” Srivasttava added.

What will be the Impact on the secondary market?

It must be noted that unlike Gurugram and Noida, Delhi is primarily a resale market as there isn’t much new stock available, except the DDA housing units and perhaps builder floors.

Apart from the primary market, the move has a far fetching impact for the secondary market, said experts. With a large number of restrictions against developing new residential projects, including high-rise apartments, the market in Delhi is highly dependent on secondary purchases. Over 90 per cent of the transactions take place in the resale market.

“A series of hikes in circle rates since late-2000s have pushed the rates beyond purchasing power of most buyers. Now with a steep cut, people willing to buy pre-owned properties will surely benefit,” a local broker said.