For most Indian investors, the love for real estate stems from the fact that compared to equities, it is relatively easy to understand and configure.
However, the sector too has its own set of jargons and it is common to hear experts use them at the drop of a hat. Think of it: how many times has your broker complained about the increase in circle rate? You know it will negatively impact your budget, but what else do you know about it and how is it different from market rate? Here are some points that will help you understand the two better and make a more informed decision.
WHAT IS A CIRCLE RATE?
Circle rate is the minimum value at which the sale or transfer of a plot, built-up house, apartment or a commercial property can occur. This rate is set by the state government's revenue department or the local development authorities. Rohan Sharma, senior manager research & REIS, JLL India, says, "The circle rate is in line with what the state government officials perceive as prices at which property sale or transfer should be undertaken." Within a city, there can be different circle rates for different localities. Since the real estate market is opaque and does not offer an accurate price index, the purpose of setting the circle rates is to put a check on speculation of property prices.
Sharma points that across all property markets in India, the circle rates are lower than the actual market rates because circle rates are not revised often enough to keep them in line with the market price. Therefore, the circle rate, while indicative of the market condition, is not an accurate figure of property prices.
WHAT IS A MARKET RATE?
Market rate is the price that a buyer pays for a property. Simply put, it is the final price decided based on the agreement between the buyer and the seller. Sunil Kapoor, executive director, Capri Global Capital, says, "Market rates are determined by the seller's expectation of price and the buyer's inclination to pay." It is a price range arrived at by looking at actual transaction prices in a location, and is a better indicator of what sellers demand and what buyers are willing to pay. As these prices are determined by demand and supply, an area with low supply but high demand will inevitably command higher prices when compared to other areas.
KNOWING THE DIFFERENCE
Even though the circle and market rates are connected, they have a limited impact on each other. The truth is that the market rates are never below the circle rates. For example, the circle rate in the Worli area of Mumbai is about Rs 32,293 per sq. ft. However, the market rate in the same area is about Rs 62,000 per sq. ft, which shows that the market rate is at a premium of 92% over the circle rate. Similarly, in Bandra (West) the circle rate is Rs 30,398 per sq. ft as against the market rate of Rs 42,000 per sq ft. A big gap between the two is an indication of a lag between the market's perception of the value and the authority's view on it. This difference has also been stated as the reason behind the flow of black money in real estate transactions.
Revising the circle rates every quarter or once in six months will keep the market rate and circle rate more in line with each other. At the same time, the state government will also generate higher tax collection from real estate transactions as stamp duty is paid on a circle rate which is in line with the market rates.
However, this will impact the property buyers with additional burden as they will have to shell out higher stamp duties, resulting in marginally higher transaction costs and overall cost of ownership. But experts believe that small problems aside, revising circle rates will go a long way in removing the black money invested in the real estate and also move the market prices in a more rational and positive direction. Rather than considering this as an unnecessary expenditure, it will help raise the investment value and therefore, also the potential resale value of the property. Finally, this will also have another positive long-term impact.
A higher revenue for the treasury means that the government has more funds available to fund infrastructure and other areas of social investments.
WHAT SHOULD YOU LOOK AT?
As a buyer, should you look at the circle rate or market rate before zeroing in on a property?
Sachin Sandhir, managing director, RICS South Asia believes market rate is a better indicator. "Buyers should look at the market rate as it determines their buying capacity and it also indicates the extent of appreciation in a given area," he adds.
To sum up, remember to check the difference between the circle rate and the market rate in the past and at current levels. A lower gap between the circle rate and market rate will be beneficial since loans are given on the basis of sales deed which is closer to the circle rates.