Commerce Minister Piyush Goyal’s advice to real estate developers that selling at realistic prices was the best bet is ‘correct’ believes NAREDCO National President Niranjan Hiranandani. However, this advice is directed at builders who have borrowed heavily from banks and are finding it difficult to service this debt, Hiranandani told Moneycontrol.
In cases where developers have taken excess debt from banks, the minister had recommended that they should reduce prices. “People may have been holding stock and not reducing prices,” he said.
“The context in which he (Goyal) said it is different. There are many developers who have borrowed money from the banks are not able to repay. It is for those people to reduce prices and sell their products so that they become liquid and pay back the bank loan instead of accumulating debt and continuing to hold the projects. That is the context in which he spoke,” he told Moneycontrol.
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Hiranandani also said it is impossible to reduce prices more than 10 percent of the ready reckoner rates because Section 43 CA of the Income Tax Act levies a gigantic penalty 45 percent for the buyer and 45 percent on the seller if a property is sold 35 percent lower than the ready reckoner rate or circle rate or jantri rate.
Budget 2020 had marginally increased the safe harbour limit available under Section 43CA, 50C and 56 from 5 percent to 10 percent. This means capital gains tax paid on the differential of circle rate (ready reckoner rates or RRV) and the actual real estate transaction value will now apply only if the difference is over 10 per cent. Previously, it applied to all transactions with a difference of over 5 per cent in circle rate value.
“They must either scrap the section of the Income Tax Act or they need to change or reduce the ready reckoner rates or the circle rate, only then can you reduce the prices,” he said.
“What he is saying is correct … it is a logical statement coming from him. Prices are already down by 10 percent, there are some places where prices can be reduced but in most cases they cannot,” he added.
“Branded developers will not reduce prices because they are not desperate. Only those builders who are in difficulty would have to do so,” he said.
Anuj Puri, Chairman – ANAROCK Property Consultants believes that while reducing property rates seems logical, there are many factors involved – some of which are beyond the control of developers. In some cities like Mumbai, there is only a minuscule difference between ready reckoner rates and market rates.
“It is not legally possible to sell properties below the RR/circle rates – so, the government would still need to reduce these rates for developers to be able to lower their prices,” he said.
The minister’s suggestion to developers to lower prices is valid as it may help reducing inventory but it may not be the most viable, experts said.
“Key markets across India are facing uncertainty, and the confidence erosion amongst buyers is visible across all categories of residential real estate. Developers are already dealing with mounting concerns over unsold inventory and liquidity. Most developers are struggling to maintain their margins and may not have too much leeway to cut prices further,” said Shishir Baijal, Chairman and Managing Director, Knight Frank India.
The crux of the problem lies in dwindling demand that the sector has been experiencing for the last few years. Therefore, the main solution will be in creating stable long-term demand by providing an adequate boost to economic growth and stability. Any movement on ready reckoner rates, stamp duties and taxes will come as a further relief to help convert the latent housing demand to sales, he said.
In the current scenario, where sales are likely to be sluggish given the weak sentiment and macro-economic environment, it would be prudent for developers to liquidate inventory to be able to retire debt from their books.
“However, the ability to offer discount will be dependent on various factors such as the location of the projects, product positioning, input cost and across the board discount may not be possible for the developer,” said Anurag Mathur, CEO, Savills India.
On June 3, union minister of commerce and industry Piyush Goyal had warned the real estate sector that the market will not recover in a hurry and that their best bet is to sell at realistic prices.
“If any of you here feels that the government will be able to finance in such a way that you can hold longer and wait for the market to improve, the market is not improving in a hurry. Things are seriously stressed and your best bet is to sell,” Goyal said at a webinar organised by NAREDCO.
“You have to complete your projects before you sell because buyers will not buy under-construction projects. In my life, I wouldn’t buy an under-construction flat from anybody. Tons and tons of builders have taken customers for a ride. You will have to complete your projects, bring partners, get investors. But unless you complete your construction, sell at realistic prices, there is no other choice,” he said.
"Those who have sold should leverage less and get rid of bank loans and survive the downturn. Those who are saddled with loans and holding on to prices have suffered," Goyal had said.
HDFC Chairman Deepak Parekh on April 14 had advised real estate developers to offload their unsold inventories at ‘whatever price’ as they require liquidity at this juncture, especially at a time when the sector is grappling with the novel coronavirus, or COVID-19, pandemic.
“How do we unwind from this crisis. For starters, the price of real estate has to come down and will come down. NAREDCO has estimated between 10 percent to 15 percent. I have said somewhere that one must be prepared even for 20 percent. For those potential future homebuyers who have got job security or cash flows, this will be an excellent buying opportunity as prices come down,” he said at a video conference organised by real estate developers associations- NAREDCO and CREDAI.