Has your broker or the person from whom you were buying the
land, flat, residential complex complained about the increase in circle rates?
Have you read about the increase of circle rate in your city in the media? Did
it raise the queries: What is a circle rate? And what is a market rate?
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 take
place. This rate is set by the state government’s revenue departments 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 the prices at which property sale or transfer
should be undertaken.” Within a city, there are different circle rates for
different localities.
Since the real estate market is opaque and there is no accurate
price index, the purpose for setting in 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 rate are not
revised often enough to keep them in tandem with the market price.
Therefore, circle rates do not represent the actual
barometer of ground realities.
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Box 1:
Circle rates is the least price at which the transaction can take
place. The associated stamp duty and registration charges for the sale of the
property is always decided on the basis of the transaction amount. And this
transaction price can be higher than the circle rate, hence the stamp duty
and registration will be higher.
For example, circle rate in Worli area of Mumbai is in the range of
Rs 32,293 per sq. ft, where as the market rate is approximately around Rs
62,000 per sq. ft; hence the market rate is at a premium of 92 per cent as
over the circle rate. Whereas in another part of the city, Bandra (West)the
circle rate is Rs 30,398 per sq. ft as against the market rate of Rs 42,000
per sq ft. Thereby, the premium over the market rate is of 38 per cent (Rates
shared by Capri Global Capital Limited).
Hence in the above example, if the transaction is done at the market
price then the stamp duty and registration charges will also be set according
to the market price, that is the transaction price.
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What is a market
rate?
Market rates are the price that one pays to buy a property,
it is determined based on the agreement between buyers and sellers. 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 lower supply but higher demand will inevitably
command higher prices when compared to another.
The difference
Even though circle rates and market rates are connected,
they have a limited impact on each other. In reality the market rates are never
below the circle rate. A significantly higher difference between the two is an
indication of lag between market perception of the value and the authority’s
view of it.
This difference has also been stated as the key reason for
black money transactions in the Indian real estate market.
In most cases when a property is sold or transactions, stamp
duties and registration charges are usually paid by the buyer. “It has been
argued that the increase in circle rates causes the rate of transactions to
drop. Be that as it may, the gap between the circle rate and the market rate
reduces and the proportion of genuine buyers with clear, accounted money
entering into transactions increases. Though this may reduce transaction
velocity, it also reduces the incidence of black money being parked into real
estate assets”, says Sharma.
Revising the circle rates every quarter or once in six
months will keep the market rate and circle rate more in tandem. At the same
time, state governments' treasuries would generate higher tax collection from
real estate transactions, as stamp duty is paid on a circle rate which is in
sync with the market rates, or close to them. Also it will significantly help
in curbing the incidence of black money and money laundering through real
estate.
However, this will impact the property buyers’ with
additional burden as they would have to shell out higher stamp duties, resulting
in marginally higher transaction costs and overall cost of ownership.
But this act will help to remove the black money in real
estate, and hence it would behave in a rational manner as far as pricing of
projects is concerned. Rather than considering this as a wasted expenditure, it
will be helpful in increasing the investment value, and therefore potential
resale value, of the property. Finally, higher revenue for the government means
more funds available for support infrastructure development.
As an individual should you look at the circle rate or
market rate more often? Sachin Sandhir, Managing Director, RICS South Asia says,
“Buyers should look at the market rate, as that determines their buying
capacity. Market rate also indicate the extent of appreciation in an area.”
Ideally one should look out for the difference between the
circle rate and market rate earlier and at current levels. For genuine buyers a less difference between
circle rate and market rate will be beneficial, since loans are given on the
basis of the sales deed, which is often closer to the circle rates.
(This is the submission draft. The story had appeared in July issue of Money Today. To read the final version click here or copy paste the given below link--
http://businesstoday.intoday.in/story/buying-property-circle-market-rates-comparison/1/207690.html)
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