GST rate cut to impact demand, improve transparency in real estate
Real Estate

GST rate cut to impact demand, improve transparency in real estate

The GST Council’s decision to reduce the GST rates for under-construction residential housing projects will lead to marginal traction in demand and bring in more transparency for home buyers, according to India Ratings and Research (Ind-Ra). Reduced total outflow for home buyers could increase the attractiveness of under-construction residential units, considering the base prices remain stable in the absence of input tax credit (ITC) availability for developers.
 
Traction in demand to improve provided base prices remain stable: The reduction in GST rates could lead to a monthly saving of Rs 800-1,000 for a homebuyer, considering an average ticket size of Rs 2.5 million with 7 per cent reduction in tax in case of affordable units. The savings could be also be in the range of Rs 2,750-3,000, considering an average ticket size of Rs 7.5 million with 7 per cent reduction in tax for the non-affordable units. This is after assuming that developers do not pass on the increase in prices due to the non-availability of ITC. The real estate sector is witnessing soft demand growth and flat prices in wake of a huge inventory of finished units or unfinished units. Companies with completed inventory are typically better placed in terms of off-load risk than those with under-construction projects, as the demand is driven by end-consumers who are averse to project risks (delay in delivery properties). However, Ind-Ra opines the change in tax rates could bring some traction in demand to the under-construction segment, if base prices remain stable.
 
Fresh buying may slowdown in FY2019: Since the new GST rate for under-construction housing projects is effective from April 1, 2019, any new buying in such projects could be deferred until the beginning of FY2020. Hence, the Q4 FY2019 sales numbers (result is a function of accounting) for most developers having major projects in under constructions stage could decline.
 
Likely repricing of housing units by developers: The rate cut ideally should support demand, assuming it results in an overall price reduction. However, considering ITC typically would account for 4 per cent to 6 per cent of sales price, resulting in net GST tax 3 per cent to 7 per cent, there is not much room for builders to reduce prices. Also, in cases where the builder was retaining any benefit of ITC, the new regime would eliminate any such possibility, and thus may result in builder re-pricing apartments or /flats. Clarity would be required for cases where the builder has already signed a sale agreement (assuming ITC he would be availing) but invoice (linked with construction progress) would be raised under the new regime (without any ITC). This situation can result in the builder renegotiating prices as the base price should go up without factoring in ITC.
 
Brings in more clarity on tax structure: Currently, there is lack of clarity with regards to the claims of developers in passing on the benefit of any ITC to end-buyers. The effective tax paid by home buyers in the current structure is thus ambiguous. Ind-Ra believes the reduction in GST rates and absence of ITC would bring in more transparency on the overall tax payment for home buyers.
 
Positive for housing finance companies, delinquencies could moderate: Any incremental demand from the GST rate cut would be positive for housing finance companies, especially in case of the affordable housing segment where the loan books have increased by 2.6x since FY2015. Concurrently, the lagged delinquencies in the affordable housing segment have reached 2 per cent. However, the delinquencies across the segments could see some moderation with incremental savings at the disposal of home buyers due to the reduction in GST rates.

The GST Council’s decision to reduce the GST rates for under-construction residential housing projects will lead to marginal traction in demand and bring in more transparency for home buyers, according to India Ratings and Research (Ind-Ra). Reduced total outflow for home buyers could increase the attractiveness of under-construction residential units, considering the base prices remain stable in the absence of input tax credit (ITC) availability for developers. Traction in demand to improve provided base prices remain stable: The reduction in GST rates could lead to a monthly saving of Rs 800-1,000 for a homebuyer, considering an average ticket size of Rs 2.5 million with 7 per cent reduction in tax in case of affordable units. The savings could be also be in the range of Rs 2,750-3,000, considering an average ticket size of Rs 7.5 million with 7 per cent reduction in tax for the non-affordable units. This is after assuming that developers do not pass on the increase in prices due to the non-availability of ITC. The real estate sector is witnessing soft demand growth and flat prices in wake of a huge inventory of finished units or unfinished units. Companies with completed inventory are typically better placed in terms of off-load risk than those with under-construction projects, as the demand is driven by end-consumers who are averse to project risks (delay in delivery properties). However, Ind-Ra opines the change in tax rates could bring some traction in demand to the under-construction segment, if base prices remain stable. Fresh buying may slowdown in FY2019: Since the new GST rate for under-construction housing projects is effective from April 1, 2019, any new buying in such projects could be deferred until the beginning of FY2020. Hence, the Q4 FY2019 sales numbers (result is a function of accounting) for most developers having major projects in under constructions stage could decline. Likely repricing of housing units by developers: The rate cut ideally should support demand, assuming it results in an overall price reduction. However, considering ITC typically would account for 4 per cent to 6 per cent of sales price, resulting in net GST tax 3 per cent to 7 per cent, there is not much room for builders to reduce prices. Also, in cases where the builder was retaining any benefit of ITC, the new regime would eliminate any such possibility, and thus may result in builder re-pricing apartments or /flats. Clarity would be required for cases where the builder has already signed a sale agreement (assuming ITC he would be availing) but invoice (linked with construction progress) would be raised under the new regime (without any ITC). This situation can result in the builder renegotiating prices as the base price should go up without factoring in ITC. Brings in more clarity on tax structure: Currently, there is lack of clarity with regards to the claims of developers in passing on the benefit of any ITC to end-buyers. The effective tax paid by home buyers in the current structure is thus ambiguous. Ind-Ra believes the reduction in GST rates and absence of ITC would bring in more transparency on the overall tax payment for home buyers. Positive for housing finance companies, delinquencies could moderate: Any incremental demand from the GST rate cut would be positive for housing finance companies, especially in case of the affordable housing segment where the loan books have increased by 2.6x since FY2015. Concurrently, the lagged delinquencies in the affordable housing segment have reached 2 per cent. However, the delinquencies across the segments could see some moderation with incremental savings at the disposal of home buyers due to the reduction in GST rates.

Next Story
Technology

AirBrick Infra Sets Rs 1 billion Target, Expands to Dubai and Tier-II Cities

AirBrick Infra, one of India’s fastest-growing AI-led commercial interior design and build firms, has announced a sales order target of Rs 1 billion for FY 2025–26. The projection represents a 50 per cent growth over the previous fiscal year and reflects rising demand, increased repeat business, and the company's robust tech-first delivery model.  Now in its third year of operations, AirBrick continues its rapid scale-up, having successfully delivered over 70 projects spanning 3 lakh sq ft in FY 2023–24. FY 2024–25 witnessed the onboarding of several Fortune 500 clients, sett..

Next Story
Resources

Virtusa Foundation Powers Green Education Drive in Bengaluru

The Virtusa Foundation, CSR arm of digital engineering and technology leader Virtusa Corporation, has announced key infrastructure and mobility initiatives at the Ramakrishna Mission, Shivanahalli, Bengaluru. The launch marks the inauguration of a 16-room residential facility for lady teachers and the deployment of two solar-powered electric buses, underscoring Virtusa’s commitment to its core pillars of Education, Environment and Empowerment (3Es).  Located on the forest fringe near Bannerghatta National Park, the initiative supports tribal and underserved communities, complementi..

Next Story
Infrastructure Urban

Godrej Enterprises Drives India’s Smart Green Logistics Shift

As India accelerates its transformation into a global manufacturing and logistics hub, Godrej Enterprises Group (GEG) is taking the lead with its smart, sustainable intralogistics solutions. Through its Material Handling Equipment (MHE) and Storage Solutions businesses, GEG is redefining operational efficiency in modern warehouses and factories using IoT, automation, and AI. GEG has consistently maintained a 20–25 per cent market share in the intralogistics sector over the past three years. Today, over 37 per cent of GEG’s revenues come from its Good & Green portfolio, and its net..

Advertisement

Advertisement

Subscribe to Our Newsletter

Get daily newsletters around different themes from Construction world.

STAY CONNECTED

Advertisement

Advertisement

Advertisement

Advertisement

Talk to us?