Why Developers Are Resisting Piyush Goyal’s Call To Drop Home Prices
Why developers are resisting calls for cutting prices even as inventory piles up.
After Piyush Goyal’s advice to sell inventory at lower prices rather than going bankrupt, developers cited high ready-reckoner rates, or the minimum price to calculate taxes, for their inability to sell at a discount.
Real estate developers are unlikely to sell their inventory at a discount in a hurry, said Niranjan Hiranandani, president of developers’ lobby Naredco, told BloombergQuint over the phone. The current regulations discourage them to sell a unit below the ready reckoner rate or circle rates, he said.
These are the lowest perceived prices in an area regulated by the states for calculation of stamp duty and premiums or fee to acquire development rights. States are reluctant to reduce this base price as it’s a source of revenue.
Still, this can’t be the only reason why property prices can’t come down because in most of the areas ready-reckoner rates are much lower than the prevailing market prices, Pankaj Kapoor, managing director and chief executive officer at property consultant Liases Foras, said.
These rates are higher than market prices in the ultra-luxury markets though, Kapoor said, and premium at times accounts for up to 14% of the selling price. There’s a need to lower the ready reckoner rates in these areas, he said.
The debate over property prices began after Goyal, minister of railways and commerce in the Modi government, urged developers to focus on selling inventory. Even before Covid-19 stalled the Indian economy, the real estate sector struggled with a liquidity crunch as non-bank lenders, biggest real estate financiers, couldn’t raise funds after the IL&FS crisis in September 2018. That only added to the pile-up of unsold homes as the industry grappled with a prolonged slowdown.
Goyal, in a webinar with members of Naredco, said developers will have to sell the inventory even if they don’t get relief on ready-reckoner rates. “Rest you have to think it out, I cannot be more explicit about it,” he said. “Unless you reduce your rates, believe me you are stuck with your material (inventory).”
You can choose to be stuck with the material and default with the bank, then the material goes away or you can choose to get rid of whatever you bought at high prices, look at it as a bad situation or unfortunate situation and move forward.Piyush Goyal
The real estate industry has been for long seeking the government’s help to tide over liquidity crisis. Goyal, however, was forthright that it’s unlikely to happen.
“If any of you (real estate developers) here feels that government will be able to finance in such a way that you can hold longer and wait for the market to improve, then the market is not improving in a hurry,” said Goyal. “Things are seriously stressed, and your best bet is to sell. And those who have sold, leveraged less and got rid of the bank loan have survived this downturn. Those who have saddled with the large loans and kept holding on the price have suffered.”
One reason for reluctance to offer discounts is that developers acquired land at very high prices, especially in bigger markets such as Delhi-NCR, Mumbai, Pune and Bengaluru.
Uday Kotak, veteran banker and newly appointed president of CII, however, still reiterated Goyal’s advice to developers. Addressing members of the industry lobby while taking over, he said, “Just because they bought land at high prices in the past, that is not relevant at this point in time.”
Income Tax Provision
Hiranandani, however, said it’s not that prices of property have not come down in the last year or two. But they remain above the ready reckoner rates, he said.
Section 43CA of the Income Tax Act, 1961 doesn’t allow sale of property below the circle rates. Even if a property is sold at a cheaper price, the stamp duty is levied at the ready-reckoner rate.
Not just that, a buyer will have to pay income tax on the difference between the stamp duty value and the transaction value, if the gap is more than Rs 50,000 or 5% of the total amount. This is considered as income from other sources in the hands of the buyer.
A senior executive at a real estate private equity fund said the real inventory problem is at the mid-budget properties where the selling price is Rs 3,000-6,000 square feet, such as Greater Noida or Gurugram or as outside Mumbai. The difference between the ready reckoner rates and the market price is not much, and in some cases the ready reckoner rate is higher, he said on the condition of anonymity to speak candidly. There it becomes difficult to reduce prices, he said.
According to Hiranandani, the National Capital Region alone has nearly 3.5 lakh unfinished apartments. Across the country, the total would be about 7 lakh units, he said, adding that the industry requires last-mile funding to complete these.
The government had last year set up a rescue fund for the sector last year to help complete stressed projects. But the Rs 25,000-crore SWAMIH Investment Fund-I, managed by SBICAP Ventures Ltd., has disbursed under Rs 100 crore for one project in nine months.
“We have asked to increase the size of the fund from Rs 25,000 crore to Rs 1,50,000 crore,” said Hiranandani. That would help all the projects stuck for last-mile financing, he said.
Even assuming the average cost of completion of one apartment at Rs 5 lakh, the total requirement is Rs 3.5 lakh crore, said Hiranandani. The government should look at involving more funds to address the liquidity issue, he said, adding that the fund envisages to offer 15% return to investors.