Govt hikes circle rates in Gurugram by up to 88% – How it will impact property market

If you are among those looking to invest or buy their dream home in Gurugram now or in the near future, here’s bad news for you. Gurugram’s district administration has increased the circle rates for the fiscal year 2021-2022, effective from April 8, by up to 88%, which will have a cascading impact on the property prices in the micro market.

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For example, the circle rate at upmarket Aralias, Magnolias and Camellias has been raised by 25%, from Rs 20,000 per sq ft to Rs 25,000 per sq ft. The circle rate at Crest has been hiked from 8,000 per sq ft to Rs 12,000 per sq ft, a hike of 50%, while at Carlton it has been increased by 88%, from Rs 8,000 per sq ft to Rs 15,000 per sq ft. The circle rates for Unitech World Spa, Laburnum, Palm Springs, Park Place, Central Park, among others, have been hiked from Rs 8,000 per sq ft to Rs 9,000 per sq ft.

The move, surprisingly, has come at a time when many other state governments have for some time either kept the circle rates unchanged or have even gone for a reduction in rates in order to keep the property prices low in the current times of the pandemic.

Industry experts say that at a time when states like Maharashtra have kept their ready reckoner rates unchanged in order to keep the housing sales momentum going and for better housing affordability, it is detrimental to increase circle rates for FY2021-22 (the minimum value below which a property cannot be registered). Doing so is bad for the overall housing demand which saw some new momentum, especially in the last two quarters. Moreover, increased rates affect housing sales by adding to the existing inventory of unsold stock.

“As per ANAROCK research, Gurugram saw total sales of nearly 7,050 units in the last three quarters post the lockdown period – Q3 2020 to Q1 2021. Despite the jump in sales q-o-q, data indicated that Gurugram’s unsold housing stock had jumped up by 3% in the previous quarter as compared to the corresponding period a year ago – from 60,130 units as on Q1 2020 to nearly 62,170 units as on Q1 2021-end. Among all cities in NCR, Gurugram has the maximum stock. Hence, it is best if the rates are at least kept the same, if not reduced,” says Anuj Puri, Chairman, ANAROCK Property Consultants.

The fact is while the government has done a slightly higher increase in the tony areas of Gurgaon, circle rates have increased in other sectors as well. This will have a cascading effect on prices.

“The only question is timing. The NCR market, including Gurugram, has only recently started showing signs of a recovery. While other residential markets across the country like Mumbai had given stamp duty reductions earlier to inject momentum, the current announcement could be counter intuitive. However, given that the municipal body needs development funds, there wasn’t much else the government could have done. It is likely that the buying momentum may be impacted for the mid segment projects and independent floors,” says Dr. Samantak Das, Chief Economist and Head of Research & REIS, JLL India.

It may be noted that circle rate of a real estate asset is the minimum rate of property that the authorities set area-wise at which properties are registered in case of a sale or transfer. The authorities keep on revising the circle rates from time to time in order to benchmark these rates with the prevailing market conditions.

A preliminary assessment of the proposed revision in the circle rates reveals some key points:

# For some locations, the circle rates breach the limits of fair market rates by a fair margin, which is not in line with the market and such a step might fail to meet the actual purpose of revision.

# In some of these proposed revisions, the new proposed circle rate is very high as compared to the existing circle rate, which has not been the case of appreciation of such properties.

# Also, the revised bracket still fails to factor in differentiated positioning of the projects, thus putting projects of differentiated positioning under same price bracket.

# In some cases, the revised circle rates are significantly higher than the existing market rates of such properties. In such cases, transactability of such properties takes a serious hit.

Thus, “the abrupt increase in some of the cases seem quite divergent from the market scenario and would be detrimental to transactability of these properties. Also, a higher circle rate translates into higher registration cost, which further translates into a higher acquisition cost and impacts transactability of the property. Although the notion of upward revision is pragmatic (helps in eradicating the cash component for secondary transactions), the extent and consistency of this revision in some cases fails to capture the average rates in the market,” says Ashutosh Kashyap, Associate Director-Advisory Services at Colliers India.

For some locations, the administration has proposed a blanket rate applicable for all assets in that location. This, however, will fail to address the inconsistency in rates/pricing of assets in that location. By applying a blanket rate, the government might overvalue some assets and undervalue others.

“Higher acquisition cost owing to higher circle rates might dampen the already struggling residential real estate domain, with secondary market facing more severe repercussions. A reconsideration into the approach adopted to determine circle rates for different projects with differentiated positioning is the need of the hour for a city like Gurugram in order to capture the market rates of properties more objectively,” advises Kashyap.