The present year, 2016 can be termed as a year of transformation for Realty sector. A year-end review of the sector will provide an insight of the decisions that will change the course of functioning. Given below are top 10 real estate stories that shall be a game changer for this sector.

Interest subsidy for first-time buyers:

The start of this financial year brought some good news for homebuyers. The budget 2016, provided for an additional deduction of Rs. 50,000 on the home loan of Rs 35 lakhs for the home that costs up to Rs. 50 lakhs.

No service tax for affordable housing:

The central government, in order to augment the affordable housing for the poor, has exempted levy of service tax on homes having carpet area up to 60 sq. mtrs.

Home Loan Interest cut:

This year, unlike bygone years, RBI declared rate cut for several times, but the banks did not respond positively to the cut. It was after continuous persuasion by the Apex Bank that the commercial passed the benefit to homebuyers.

 RERA (Real Estate Regulation Act:

The act to protect Consumers interest came into existence this year. The act also provides for realty sector regulation. It will regulate residential and commercial real estate, developers, brokers and homebuyers alike. Though, the effectiveness of the act will depend on how much of it is adapted by the states and its implementation by them.

GST (Goods and Service Tax):

Touted as biggest indirect tax reform since Independence, GST will create a unified taxation regime. Its impact on property prices will depend on the adoption of lower or higher rate slab.

Clarity on RIET and invIT’s

This year SEBI, in order to facilitate RIET and invIT’s simplified regulation for both instruments.

Private Equity Funding:

PE investment in the real estate sector grew 22% during Jan-Sept. 2016 to Rs 28,300 Crores from Rs. 23,200 Crores during the corresponding period last year.

Benami Property Act:

 This act came into effect on Nov. 1, 2016. The aim of this act is to prohibit Benami transactions in Real Estate sector and curbing Black money menace in the sector.

Demonetization:

This move by the Government is expected to impact primary, resale segment and land prices in short term. The short-term slowdown is expected but in long-term, there will be clean up of black money in real estate.

 Unprecedented Consumer activism:

This year, 2016 will go the annals of history as the landmark year om terms of legal judgments pronounced in favor of homebuyers.

Different segments of the real estate market, like primary, resale, land, will be impacted differently by the recent demonetization. Here is an analysis how each segment is likely to fare in the short to long term

People look to buy a resale flat as their second investment, so that it could be let out on rent. Generally, such investment is supported by taking a home loan and it is not possible to proceed in nine out of the 10 projects owing to the presence of a substantial cash component in these deals. On the other hand, many people who have recently sold their properties and accepted partial payment in cash have no option but to declare the amount and pay taxes on it.

Demonetization has resulted in a slowdown in sales, as buyers and sellers wait for cash availability to normalize.

The primary market (purchase of properties directly from developers) will not be affected much because it is already at the bottom of the price trends and further corrections are not possible. Moreover, the primary market is mortgage driven, especially at the lower and mid-end and will not face many problems. However, the luxury segment could see a bit of Land sale and the secondary (resale) market are likely to be hit for some time though due to the liquidity crunch, as investors wait for better returns.

Will all property deals be in white post demonetization?

Property consultants maintain that in the primary market, nearly all the reputed builders in metros have stopped taking cash. With transactions occurring through accounted payments, such as cheques, demand drafts or bank transfers, experts opine that the primary markets will not be affected.

Nearly 90% of the primary market in the metros, will not be impacted. The tier-2 and tier-3 cities will surely be affected though as the cash component is relatively higher in these cities.

Demonetization may also cause a slight spike in distress sales. Earlier, consumers with ready payment abilities were able to bargain and get a good deal. Now, this may be more unlikely.

Demonetization’s impact on artificial inflation

A common belief is that the real estate market is artificially inflated, due to the circulation of black money. However, developers maintain that this is not true for primary markets, as investors are no longer present in this market. The primary reason for this is that the return on investment in properties for investors is not sufficient. The purchasers are actual end-users. Thus, there should not be a significant effect on the prices.

Experts explain that inflated property prices are a result of the presence of black money. As a result, the prices of resale flats will come down by 20%-40%. With demonetization, such artificial demand will go down in the medium term, which is a major positive for realty.

Experts don’t rule out the possibility of artificial inflation in the long run. If a seller is unable to accept a ‘black’ component for the sale consideration, he may simply ask for the entire consideration in ‘white’ and levy on the purchaser, all the taxes that will be additionally incident in the process, resulting in increased prices. The same thing could happen in the primary market if upstream transactions have unaccounted components.

In this scenario, recent laws on real estate, like RERA, GST, and Real Estate Investment Trusts (REITs), can bring in the much-needed transparency and increase buyers’ confidence in the real estate market.

Which property markets will be affected by demonetization?

• Nearly 90% of the primary market in the metros will not be impacted by demonetization.
• Tier-2 and tier-3 cities are likely to be affected, as the cash component is relatively higher in these cities.
• Land sales and the secondary (resale) market are likely to be affected for some time, due to the liquidity crunch.

Real estate does give better ROI than any other investment instrument but can an end-user afford to act like an investor? Here are some answers

The psychology of home buyers and their expectations vis-à-vis return on investment (ROI) have traditionally been different for investors and end-users. However, this difference may be gradually disappearing, at least in the top eight cities.

Thinking in terms of risk-versus-return is something that is predominantly done by investors. The mindset of an average end-user is similar to that of a seasoned investor today, is very much debatable. Take the case of a person who rented an apartment in Atta Market, close to the central business district of Noida, at Rs 18,000 per month. With 12 years to go before his retirement, he invested in a property in Ghaziabad.

He did this with the belief that he made a sound investment decision. He felt that when he can buy the same kind of property at Rs 60 lakh in Ghaziabad then what is the point in investing Rs one crore in Noida? It does not make sense to pay extra for a property that has lesser chances of appreciating; as against an upcoming market, was his logic. Moreover, this investment gave him the flexibility of mobility, if he is transferred in future.

This raises a fundamental question, as to whether houses have become more like trading commodities and the emotional quotient associated with its purchase, has diminished in leading Indian cities. In real estate, even if the investor does not have very sound economic wisdom, the chances are that he will not lose his money. Compared to real estate, stocks are risky, as most of the companies are not blue chips and will have debt. So, even if the quantum of return is not that high in real estate, it remains a safe investment avenue, he maintains.

Experts point out that one also has to consider the buying pattern. Indians generally prefer to buy property in the top eight cities where they work, or in their hometowns where they intend to retire, even if they live on rent in the city where they work. So, if a person is not an investor and even if he is advised that the research has established that there is fantastic return in a city other than his place of work or hometown, it is unlikely that he will invest there.

Analysts maintain that end-users should not buy homes on the basis of expected price appreciation. A house may give better ROI than any other investment instrument but one has to look at a long-term time frame – of around ten years. In the residential segment, even if you pick the right project at the right price, it may take three to five years to get ROI. The time frame is important for investors as well, and the product will vary accordingly. For instance, in the residential segment, speculators can opt for pre-launch properties in north India and make money in one or two years. For mid to long-term investors, the commercial and retail segments may be a better option.

However, if one is looking at a fairly long-term period, then, investing in the land would be ideal, as the returns are highest in this category. There are instances where people have made returns worth a thousand times their initial investment, over a period of 15-20 years. Ultimately, each homebuyer has to take a conscious call, on whether s/he is an investor or an end-user.

Any difference between the agreement value and the ready reckoner value of a property, has implications, not only on the stamp duty payable but also on the income tax of the buyer and seller.

When you enter into an agreement to buy a property, you have to pay a certain amount to the government, which is known as stamp duty. The amount of stamp duty is generally based on the value of the property mentioned in the agreement.

To avoid evasion of stamp duty through the undervaluation for agreements and to minimize the disputes on the quantum of stamp duty, all state governments publish an area-wise, stamp duty ready reckoner on a yearly basis. If the value of the property based on the ready reckoner is higher than the value of the property stated in the agreement, then, you will have to pay the stamp duty on the basis of the value computed from the rates in the ready reckoner. However, if the agreement value is higher than the ready reckoner valuation, the stamp duty payable will be calculated with reference to the agreement value. The stamp duty valuation also has implications on the income tax of buyers and sellers.

Importance for the seller under income tax laws

As per Section 50C of the Income Tax Act, in case the agreement value is lower than the stamp duty valuation, the law presumes that the seller has received an amount equal to the stamp duty valuation and the capital gains are computed accordingly. However, if the seller claims that the stamp duty valuation is higher than the fair market value of the property, the income tax officer can ask its valuation officer to assess the value the property for capital gains purpose. The value determined by this officer shall be treated as the sale consideration of the property for income tax purpose. However, if the valuation given by the income tax officer is higher than the stamp duty valuation, such excess valuation shall be ignored and only the stamp duty valuation shall be treated as the sale consideration. This provision is applicable to all the taxpayers, including limited companies.

In cases, where the Stamp duty valuation is higher than the agreement value, and the taxpayer invests the net sale consideration under Section 54F to claim exemption from long-term capital gains, s/he may have to borrow money as the money received may be lower than the amount required to be invested.

Importance for the buyer under income tax laws

As per Section 56(2) (vii)(b) of the Income Tax Act, in case the stamp duty valuation of the purchased property is higher by more than Rs 50,000, then, the difference between the stamp duty valuation and the agreement value shall be treated as income of the buyer. This provision applies to Hindu undivided families (HUFs) and individuals only.

However, if the agreement date and the date of registration are different and thus, the values on these dates are also different, the valuation as on the date of agreement can be considered for this purpose, only if full or part consideration was paid by means other than cash, either on or before the date of the agreement.

The choice of a fixed, floating, or semi-fixed interest rate home loan, depends on factors such as the tenure of the loan, age of the applicant and prevailing market conditions

When opting for a home loan, buyers have a choice between three types of schemes – fixed, semi-fixed and floating interest rates. Choosing the correct scheme can be a tricky affair. Various factors can affect buyers in short and long term if a wrong home loan scheme is selected.

In a home loan with a fixed rate of interest, the equated monthly installments or EMIs will remain constant over the tenure of the loan. It is useful to opt for this if interest rates have bottomed out. However, fixed rates are usually higher than floating rates at any given point. On the other hand, for floating interest rate loans, the EMIs would fluctuate as per the market dynamics, as interest rates increase or decrease.”

A semi-fixed rate home loan is a combination of fixed and floating rates. The interest rates on such loans remain unchanged for a specified period of time, after which, the rate of interest is converted to floating.

What suits you?

Experts point out that when interest rates were rising, very few banks and financial institutions were willing to offer fixed rate loans. They were charging at around two to three percent higher than the prevailing floating interest rates. However, now that interest rates are on a downturn, banks have cut the margin spread and are trying to woo customers, with fixed and semi-fixed rate loans.

A home loan seeker must analyze all the factors before finalizing a loan and opt for a scheme that best suits his/her needs and not be lured by the bank’s lucrative offers.

Who should go for Floating Vs Fixed Vs Semi-Fixed rate loan

Floating rate is suitable for the persons who take the loan for a longer period which is more than 20 years. The Fixed rate is apt for short/medium term loan seekers while semi-fixed rates are suitable for medium term loan seekers.

When interest rates are struggling to stay afloat or when the rate is to fall it is advisable to go for floating rate. The Fixed rate is suitable when the interest rate is subject to adopt higher trajectory or go up. Semi-fixed rates will ideally be suited to the situation when in short term the rates are expected to rise and fall down in further course.

When the financial tide is in your favor or the income is enough to support rate fluctuation it is proper to go for floating rate. In contrast, if the tide is not in your favor i.e. the income flow is expected to remain stagnant, opt for fixed rate. The option of semi-fixed rate is also viable for such loan seekers too.

If the borrowers are in the age group of 30-35 years then they should go for floating rate of interest. Loan seeker above 50 years of age should opt for fixed rate due to their low ability to take risks. The same logic will apply on loan seekers who dither from taking risks.

Nowadays, banks are providing flexible tenures for repayment of loans, for a maximum period up to 30 years as per their requirement/eligibility. Some websites and newspapers also give a comparative analysis of housing loan schemes of various banks. Loan seekers can visit the websites of various banks, to get details of housing and other loan products and select a suitable bank accordingly.

The type of interest rate you choose has an impact on the monthly EMIs you pay. It is important that one should know the difference between the fixed rate home loan and floating rate home loan.

Market conditions and its bearing on interest rate schemes

Multiple rate cuts by the RBI, indicate that the market is entering a period of low-interest rates and the same is likely to fall further, in the coming years.

After a series of rate cuts, the RBI is now focusing on its transmission and has been urging banks to pass on the rate cuts to customers, through their lending rates. Consequently, banks may reduce their rates, which would benefit borrowers of floating rate home loans.