Sucheta Dalal :Maharashtra Stamp duty hike: “Neither can you afford to own a home nor take it on rent”
Sucheta Dalal

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Maharashtra Stamp duty hike: “Neither can you afford to own a home, nor take it on rent”  

March 26, 2012

As if the spiralling prices were not enough due to cost increase of 5%-15% in cement, steel and labour, the state government is proposing to increase stamp duty on rentals to 160 times.

Moneylife Digital Team

While people often accuse builders and developers for hiking property rates, they are not the only ones to be blamed. Even the Maharashtra government is again raising stamp duty for leave-and-licence agreements. According to reports, the state government has proposed to hike stamp duty on leave-licence to 0.1% on market value or 1% of the average annual rent or deposit paid, whichever is higher, for residential properties. For commercial properties, the duty for lease agreements over 60 months is 0.4 per cent.

This is a big jump from the fixed amount of Rs 25,000 for residential and Rs 50,000 for commercial properties for 60 months, as is the rule now. In short, there is no relief for consumers. They can neither can afford to own a home, nor they can afford to rent one in the state. And according to some experts, the property rates in Mumbai will not come down and so there will not be any increase in sales as well.

In a report Crisil Research, said, “Notwithstanding a 40% dip in sales of new homes since mid-2011, a sharp rise in construction and funding costs, in addition to amendments to the Development Control Regulations (DCR), will increase costs for builders and prevent a reduction in home prices.”

Pankaj Kapoor, MD, Liases Foras, said, “I believe the market is going to be in hibernation for the next two to three years: neither will there be any increase in sales, nor will the prices come down. Also, new approvals are unlikely to come. Many builders' plans have gone for a toss because of the new DCR.” He said that a correction of 30% in prices is necessary, but it is not likely to happen.

With regard to the 40% slump in sales of new homes between April 2011 and February 2012, Sudhir Nair, head, CRISIL Research, explained, “Through 2011, even as the number of enquiries from buyers remained strong -- implying healthy latent demand—only a few enquiries translated into actual sales. Higher interest rates, slower economic growth, inflationary pressure and expectation of price correction led most buyers to defer buying decisions. In 2012, the latent demand is likely to spur a moderate 10% increase in new home sales.”

While new home prices will remain steady across Mumbai, the southern and central parts of the city will stand out as exceptions, says the report. Prices are likely to decline by 6%-7% in South Mumbai (Napean Sea Road, Tardeo, Opera House, Peddar Road) and 8%-10% in Central Mumbai (Worli, Prabhadevi, Lower Parel).

“Although prices fell by 20% and 10% in Central and South Mumbai in 2011, new homes in these areas will still remain unaffordable for most buyers,” added Mr Nair.

Crisil says that in 2012, cement prices in Mumbai will rise by 5%, steel by 7%-9% and labour costs will go up by 10%-15%. Funding costs, too, will remain high. On top of that, the new DCR will increase cost for builders by about 15%. All this does not leave any room for price correction.

However, Pranay Vakil, chairman, Knight Frank India said, “I believe that attitudes may soften because there is a lot of pressure on developers whose interest on loans are due. There are many reasons why the prices are not coming down. If a builder is selling flats at a certain rate and then offers later projects at a lower price, people who have bought their flats earlier will refuse to pay a higher price. But the pressure is mounting, and the rates for repayment are high. We cannot say for sure when the softening will start. But decline may be expected.”

What seems to be more distressing is the proposed hike in stamp duty in Maharashtra for leave-license; which would result in a hike in rental prices.

Subhankar Mitra, head-strategic consulting (west) Jones Lang LaSalle India, said, “Residential apartments are usually given on renewable leases of 11 months, with the nature of agreement being leave and license. The current stamp duty on these agreements was nominal at 0.1% of the lease amount. As things stand now, a person paying a rent of Rs10,000 per month will have to cough up stamp duty to the tune of Rs1,200 as opposed to Rs120.”

Mr Mitra said that on an immediate basis, there may not be any significant change in demand. However, more and more tenants in cities like Mumbai and Pune will begin showing a preference for owned rather than leased properties, as this would make more financial sense.

“There is no relief for the consumer, because the hike in stamp duty was uncalled for; and is strictly revenue-centric. It is not right to blame only the builders for price rise. Earlier, government had reduced stamp duty rates, and that led to increase in sales volumes, but now again they are raising the rates. Neither can the people afford owning homes, nor can they afford to rent,” added Mr Kapoor.

-- Sucheta Dalal