Developers will be unwilling to absorb this new tax burden and will pass it onto the buyers, Jones Lang LaSalle Meghraj senior vice-president for capital markets Gautam Hora said
Home prices will increase by about 2.5% with the implementation of service tax on the residential segment with effect from 1st July, reports PTI.
"The implementation of service tax on residential properties will result in an increase in the price of homes for end-consumers. Developers will justifiably be unwilling to absorb this new tax burden and naturally pass it onto the buyers," Jones Lang LaSalle Meghraj (JLLM) senior vice-president for capital markets Gautam Hora said.
"The increase would be to the tune of 2.58%.
Following this, overall demand and sales of residential properties will take a significant hit in all cities," Mr Hora added.
In the Budget for 2010-11, finance minister Pranab Mukherjee had brought in real-estate complexes under the ambit of service tax, unless the entire consideration for the property is paid after completion of construction.
Finance ministry officials later clarified that service tax would be imposed on 33% of the total sale price as there is an abatement of 67% for input cost.
While replying to the debate on the Finance Bill in Parliament, Mr Mukherjee increased the rate of abatement from 67% to 75% of the gross value where such value includes the value of the land constructed upon.
Mr Hora of JLLM noted that the rise is enough to increase the unaffordability quotient of homes, especially in cities like Mumbai and Delhi, where home-buyers are already struggling with the recent spurt in prices.
In cities like Pune, Bangalore, Chennai and Hyderabad, where consumers are more price-sensitive, developers will have greater challenge with increasing the prices, JLLM said.
"The service tax on homes comes at an inopportune time, since the revival in residential real estate is still in its early stages. Such a setback will present yet another stumbling block," it added.
The company holds 350 acres of land in its portfolio, and is adopting a strategy of selling land parcels outright rather than develop them
Emerald Acres Pvt Ltd, a land bank company owned by Madhur Bajaj, vice-chairman of Bajaj Auto, is planning to enter the market in the next four months and sell the land that it owns.
Currently, the company holds 350 acres of land in its portfolio and plans to add more land after selling its current holdings. Emerald Acres has no connection with the Bajaj Group. The company has hired proerpty consultant Cushman & Wakefield and RBSA, a valuation firm for evaluating two different land parcels. They will come up with the prices shortly.
"We will come into the market in the next three-four months. We took time to enter the market because we were making sure that all the required permissions are in place before we sell the land. Developers can start work right from day one," said Madhur Bajaj, chairman, Emerald Acres.
Initially, the company is planning to sell a 70-acre plot at Murbad near Thane in the next four months. It owns land in the stretch along the Mumbai-Pune Highway and its largest holding-122 acres-is located at Lonavala, a hill station near Pune. But the company has no plans to venture into real-estate development and would rather sell parcels of land outright to developers.
"Cushman & Wakefield is evaluating the Murbad land and RBSA is evaluating the Lonavala land. As soon as they are done with evaluations we would be able to fix the price of these two pieces of land," said Mr Bajaj.
Bajaj's Pune holding is so large that it can be used to build an entire township. The land is spread across more than 100 acres. It has to be seen at what price the company sells the land parcels. Recently, Mumbai witnessed a land deal at the Wadala Truck Terminal (WTT) located in central Mumbai. The Lodha Group won the bid at Rs5,723 crore while MMRDA had set a reserve price of Rs50,000 per sq metre and was seeking a minimum price of Rs1,980 crore for the property.
Many developers have made their money buying land cheap, holding on to it for a few years and building and selling homes on these properties subsequently, after prices have tripled or quadrupled. Currently, developers are cautious over buying land as sales have slowed down in the industry.
However, developers have slowly started buying land after last year's slowdown in the industry. After the slowdown in 2008, DLF, Unitech Ltd and Omaxe Ltd had decided to follow a conservative policy if expandint their land bank, after having spent vast sums of money in the previous two years and bidding for parcels of land that have fetched record prices at land auctions.