GST rate cut a booster shot for real estate sector; stocks surge

Residential properties Representational image | Reuters

India's residential real estate market, which had only recently started looking up, has got a booster shot with the Goods and Service Tax (GST) Council deciding to slash rates on under-construction apartments or projects awaiting completion certificate. The announcement sent real estate stocks on a high, with most listed developers trading 1-4 per cent higher in morning trade on Monday.

So far, a GST rate of 12 per cent was levied on homes under construction, along with an input tax credit. A rate of 8 per cent was charged for affordable housing projects. The GST rates have been lowered to 5 per cent for normal housing projects and just 1 per cent for affordable homes. There will, however, be no input tax credit.

Since, no GST was applicable on finished houses, end-consumer interest in under-construction apartments was low, as customers were instead seeking ready-to-move-in properties. The GST reduction will go a long way in giving the sector a boost.

Apart from the cut in GST rates, extending the affordable housing definition for the purpose of availing GST benefits to homes priced up to Rs 45 lakh will help developers reduce their inventories, while also making more housing units available for end users seeking affordable homes.

"There are as many as 5.88 lakh under-construction homes lying unsold in the top 7 cities. Of these, 34 per cent are priced below Rs 40 lakh alone. With affordable housing now being defined within Rs 45 lakh budget, more properties qualify for this sweet spot category. The GST cut, coupled with this critical change in definition, will induce more sales in homes falling in this budget range—a win-win for both builders and buyers," said Anuj Puri, chairman of Anarock Property Consultants.

Property prices in top cities in India remain expensive, despite the slowdown in the last few years. According to consultants Knight Frank, ideal affordability should be around 4.5 times the average annual household income in a city. In Mumbai, despite some correction in prices, a home still costs around 7 times the annual household income, while in the national capital region (NCR), and Hyderabad too, it costs around 5 times.

Housing sales volumes across top cities rose in 2018, the first time in seven years, and the GST rate cut will give it a further fillip.

"The elimination of input credit tax benefit may hit profitability for the supply side; however, the potential demand generation as a result of this (GST reduction) move will far outweigh any negative aspects leading to greater sales numbers and revenues," said Shishir Baijal, chairman, Knight Frank.

The GST rate cut could potentially reduce buyers' payout by 6-7 per cent on the overall purchase, added Baijal.

Pan India, the unsold housing inventory is estimated to be around 6.73 lakh units, which could now come down with an expected pick-up in sales.

The cut in GST rates comes on the back of a slew of measures that were announced for the realty sector in the interim budget this year. The budget proposed to exempt levy of income tax on notional rent on a second self-occupied house. A roll-over of capital gains on investment made in two houses for an amount of Rs 2 crore was also proposed.

"GST rate slash will give an impetus to affordable housing and enthuse home buyers to make a sale," said Niranjan Hiranandani, president of National Real Estate Development Council.

In morning trades, while Sunteck Realty surged 4.8 per cent, others like Godrej Properties, Prestige Estates, Sobha, Indiabulls Real Estate, and Oberoi Realty rose around 2 per cent.