Hiking circle rates seems to be in vogue in the NCR arena. Delhi has increased rates by 100 per cent (it is yet to be notified, though), Gurgaon by 5 to 100 per cent, and UP made the move a few months ago.
Though these figures look impressive, property buyers and existing owners are concerned about just one thing will they have to pay more and will these hikes make a huge or a marginal difference to their budgets?
Before we discuss the points in details, let us take a look at what circle rates are and their purpose. Circle rate refers to the minimum notified price below which one cannot sell property. It is a mechanism to ensure some amount of parity between the actual and the market price and is generally based on actual transactional data. It is the uniform measure to calculate the amount to be paid as stamp duty and registration fee. It is an attempt to curb the use of black money in sale of properties and to ensure that the government does not lose out on revenue due to undervaluation of properties.
However, experts point out that if revenues increase because of the circle rates, there needs to be some mechanism of funding infrastructure through the incremental revenue across the region.
How are prices affected?
How much of a difference do circle rates make to property prices? Let us examine the case of someone who bought a category A property (Delhi is divided into eight categories A to H) for, say, R150,000 per sq m. The registered price of the property at pre-increase circle rates was R43,000 per sq m. The stamp duty was paid at 6 per cent, which comes to R2580. The total sales price paid was R152,580 per sq m. Post increase, the registered price of the same property should go up to R86,000, with the stamp duty payable at R5160.
The total sales price payable should be R155,160 per sq m a net increase of R2580. This implies that the percentile increase in sales price for the end buyer may work out to be 1.7 per cent. In short, the revised circle rates may not have much impact on property prices but the cost of registration would definitely go up.
“The primary aim of the revision in circle rates is to minimise the difference between the average market rate and the existing circle rates.
Registration of property will definitely become a costlier affair while property valuation will move closer to fair or market value,“ points out Sachin Sandhir, managing director and country head of The Royal Institution of Chartered Surveyor (RICS), India.
An increase in circle rates will help buyers get higher loans as banks and financial organisationsdisburse loans on the basis of sale deeds, which take into account circle rates while gauging property prices.
Buyers can avail up to 80-85 per cent of the total circle rate as home loans, which are extended only on the basis of the white component of the money involved in the transaction, adds Sandhir.
This means that the property buyer or current owner should now make an allowance for expensive registration.
“Since the minimum stamp duty on sale of a property is calculated at circle rate, increase in circle rates will automatically increase the minimum stamp duty liability.
Generally, when the circle rate of a property is much lower than its actual market value, it has been seen to fuel the `black money component' in sale transactions by parties looking to minimise their stamp duty liability.
Undoubtedly, the greater the discrepancy between the circle rate of a property and its market value, the greater is the loss of revenue to the government.'' says Sunil Tyagi, Senior Partner, ZEUS Law Associates.
Circle rates have a differential impact on primary and secondary residential dealings. “The primary market dealings are primarily all in white and the increase in circle rates is unlikely to have any direct impact on both volumes and prices of real estate transactions. However, in secondary markets, where the white component is proportionately lower in the total transaction value, the cost of residential units will increase marginally for the buyer. Also, because the seller will have to pay higher capital gains tax, he might increase the quoted price of his unit, thereby increasing the residential prices,“ points out Priyankar Bhikshu of DTZ India.
Frequency of revision While Delhi saw the notification of circle rates for the first time in 2007, its neighbours Uttar Pradesh and Haryana have been hiking up rates over the last couple of years.
Gurgaon has seen an increase for the second time in seven months this year, with some areas registering a spike of 100 per cent. At Ghaziabad rates went up by 10-20 per cent and Noida saw two hikes within a span of 12 months in November last year and in August this year.
The competent authority for approving circle rates is the Cabinet of the Delhi government in case of Delhi and in UP these rates are approved by the district magistrate Is a single rate representative of an area?
Generally a single circle rate is prescribed for a whole colony/locality. Is it justified?
To some extent the circle rates in Ghaziabad/Noida/ Gurgaon represent the market rates. However, in Delhi these rates are much lower than the market rates. For example the value of an MIG flat (of approximately 75 sq mt builtup area, which is around 1000 sq ft super area) in a group housing society/DDA colony in Delhi, as per the existing circle rate (R11,300 per sq mt) is only R8,47,500. But does it reflect the true value of this kind of property? Even if these rates are doubled, the value as per circle rates will be only R16,95,000 much lesser than the market value. Therefore, revisions in the circle rates are not going to make the transaction a costly affair as deals stuck now are far more expensive than the rates.
However, no two real estate assets are identical, and all differ in terms of location one of the most important determinants of their value.
This makes it impossible to prescribe one acceptable rate for a whole locality. The absence of a market-based pricing mechanism calls for an expert appraisal/valuation of every real estate/property, which is not possible at the time of prescribing circle rates, points out B P Singh, a government registered valuer and chartered surveyor. Ajay Dabas of Certes Realty Ltd concurs, saying there are still areas within Delhi where land prices are less than the circle rates announced. He cites the example of Kanjhawala village, where land is available for around R8000 to R9000 per metre, despite rates being revised to R13400 per metre. This is not encouraging at all.
It would have been a good idea to have a physical survey of market prices undertaken in some new zones under MPD 2021. Clear distinction needs to be made between the rural and urban villages, though they might be bracketed together. Hypothesis: Bawana and Munirka are not comparable.
Unique to India Valuation is typically a supplementary function of property registration and the concept of `circle rates' which set the minimum rate of valuation is quite unique to India. The establishment of a clear `chain of title' in ownership of land or property are essential precursors to any property transaction. Thus, it is imperative to have an effective and responsive registration mechanism which will ensure accurate property valuation. In several developed countries procedures for property registrations are very streamlined as markets strictly adhere to regulatory mechanisms and have in place a transparent and accessible information system due to which there are no predetermined valuation rates, which are accessed on market dynamics. In the United States, France Spain, Italy etc, a system of publicly accessible archives of recorded deeds are maintained, which aid in the establishment of true ownership of property ¬ summarised in a title abstract. In the United Kingdom, Netherlands and Germany, an immovable property-based title registration system exists
Courtesy:-HT Estate 23-10-2010
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