By, Namrata Kohli 

The increase in circle rates came as a huge dampener to the realty sector in 2012. But what is the real implication of this raise for homebuyers: is it a curse all the way or could it be a blessing in disguise. 

Real estate properties are registered at circle rates. Circle rates were introduced in July 2007 only and the capital was divided into eight categories. This is the minimum valuation at which properties are registered with the government. 

Recently, the circle rates were raised in Delhi in the range of 20-200 per cent across different categories of properties in the city. 

Category A localities of Vasant Vihar, Shanti Niketan,Anand Niketan saw a steep hike of 200 per cent, Category B properties saw a jump of 50 per cent while properties in the remaining six categories - C to H - saw a hike of 20-25 per cent. 

The decision, effectively, 'spared' people in middle-class neighbourhoods and urban villages across the city, and in many ways is being seen as a ploy to appease vote banks and garner greater moolah for the Delhi government's revenue department. 

But there are other aspects to this increase: for genuine buyers this may be good news as they can avail higher loans from banks and financial institutions. These institutions typically disburse loans on the basis of sales deed, which take into account circle rates. Buyers can avail up to 80-85 per cent of the total circle rate as home loan, which is extended only on the basis of the white component of transaction amount. 

On the upside, the revision in circle rates can help minimize the difference between the average market rate and the existing circle rates. While the increase tends to make registration of property a costlier affair, it also allows property valuation to move closer to fair or market value. It's a well-known fact that market value of property is far higher than the value shown on the sale or lease deed to pay stamp duty. 

"The raise is expected to bring greater transparency into the market," says Sachin Sandhir, the MD of RICS South Asia.

"Even as circle rates have been revised upwards, the prices at which properties are being registered continue to remain below the actual market value and provide scope for the absorption of black money in property transactions. Therefore increase in circle rates can definitely help bring about a greater degree of transparency in the market and while the total sales price will increase marginally with the upward revision in the base rates, it is likely that the impact on the consumer will be negligible. Therefore, it is unlikely that genuine buyers will defer property purchase or registration as a consequence of the upward revision in circle rates," Sandhir says. 

How are circle rates determined: It seems many factors are taken into account while determining the benchmark 'circle rate' like land rates, multiplicative use factors, cost of construction, type of structure, minimum rates of built-up flats and multiplicative factors for private flats. 

However 'circle rates' are not determined based on any specific methodology or calculation but rather as a function of market dynamics and trends, which reflect the number of properties being registered with the authorities concerned and the price bands at which property transactions take place. Property prices on the other hand are governed more by the principles of demand and supply. 

Higher the base rate levied, higher will be revenues generated as registration fee and stamp duty is calculated as a percentage of the registered price of a property. So the increase in circle rates means greater revenue for the government. "The raise implies an increase in the capital gain tax," says Sanjay K Chadha, advocate and partner at BSK Legal, "as the capital gain is computed with reference to low circle rates instead of market rate." It has been noted that with the increase in the circle rates, there has been a sharp drop in the registries, which take place at the all sub-registrars throughout Delhi. 

Chadha says: "The reason for this decline is the high charges for registration and less role of black money. Overall the increase will not only curb black money, but it will get more revenue and save people from accepting part-payment in black." The decision will deter to some extent real estate traders from making speculative investments.

 

source: http://economictimes.indiatimes.com/markets/real-estate/policy/increase-in-circle-rates-good-or-a-huge-dampener-to-the-realty-sector/articleshow/18085739.cms