Reduced Headline GST May Not Work at Lower Price Points
We note that the revised rates of GST may not necessarily work favourably in case of lower price-point apartments and where the builder has given the consumer full benefit of input tax credit.
Kotak Institutional Equities Research
A headline GST of 5% compared to 12% previously is optically much lower, though needs to be seen in the context of removal of input tax credit. Buyers in cities such as Mumbai and will enjoy savings of 3-4%. In general, consumers will be better with price points higher than Rs 6,000/sq. ft (assuming a construction cost of Rs2,300/sq. ft).
Developers in select cities will have to take marginal price increases or bear the brunt of lower margins at unchanged prices. We note that exemption of GST on payments for JDA/FSI works favorably, as it limits the impact of lack of input tax credit. Developers who retained part of the input tax credit will be worse-off under the new regime. We note that incremental clarity is required on usage of extant input tax credit for services and material cost already paid. Further, we highlight that the new tax rate becomes applicable from April 1, 2019, and accordingly we see March 2019 as a transition month that will likely see lower sales, and will even have extant buyers requesting for delay in raise of new bills.
The revision in headline GST rates will likely help lower real estate prices in high-realization markets such as Mumbai and Delhi that will benefit under-construction properties of Oberoi, Sunteck, Godrej and DLF among our coverage, while being less beneficial for players in Bangalore such as Prestige, Brigade and Sobha. Most of the coverage universe does not sell in the under Rs4.5 mn ticket size and so will not benefit from the lower GST rate applicable for affordable housing.
The new GST rules have reduced the headline rate to 1% from 8% (with input tax credit) for affordable housing. However, the definition of affordable housing now allows apartments of 60 sq. m for metro cities and 90 sq. m for non-metro cities with a cap on the value of the asset at Rs 4.5 mn. We note that a lot of small sized apartments in metro cities may not be within the Rs 4.5 mn limit and therefore may not enjoy the lower GST under affordable housing. Apartments in other cities and those in the outskirts of metros with ticket size up to Rs 4.5 mn will be the key beneficiaries depending on the price point and construction cost. Read more http://digital.realtyplusmag.com/2086234/Realty-Plus/VOLUME-15-%7C-ISSUE-07-%7C-MARCH-2019#dual/48/1
Most HFCs have focused on lower-end of the market with average ticket size of Rs 2-3 mn. The average ticket size of HDFC is Rs2.6 mn and LICHF is Rs2.4 mn. Assuming average LTV of 45% for LICHF and 60% for HDFC, average price of apartment works out to Rs4.5-5.2 mn—broadly around the cap of Rs45 mn for apartments attracting 1% GST.
Market sources suggest that customers have been waiting on the side for the projects to be completed to avoid the burden of GST; notably, GST is applicable only on under construction projects. This had further stretched the financials of under-construction projects that were constrained due to weak demand and stable real estate prices. Higher under construction sales in metros, post a price reduction following lower GST rates, will improve the financial health of large developers operating in these locations; this, in turn will reduce the asset quality risk for HFCs lending to this segment.