Workers at a construction site. (Photographer: Ruhani Kaur/Bloomberg)

Real Estate Stocks Rise On GST Boost As Brokerages See Pick Up In Sales

Stocks of the real estate companies rallied in early trade after the Goods and Services Tax Council approved lowering tax rates on under-construction properties to 5 percent without input tax credit from 12 percent.

The stocks gained nearly 4 percent today, led by Unitech Ltd.’s 3.85 percent rise, according to Bloomberg. The Nifty Real Estate Index—which had rallied for five straight days on anticipation of tax rate cuts—opened 2.5 percent higher with all its stocks trading with positive bias.

According to the move, housing projects will attract 1 percent tax against 8 percent earlier, with the definition of affordable housing linked to carpet area. That will mean:

  • A residential house of carpet area of up to 90 square metres in non-metropolitan cities.
  • A property of 60 sq m area in metropolitan cities with value of up to Rs 45 lakh.

GST for affordable housing will be 1 percent without input tax credit from the current 8 percent with credit. Non-affordable housing will be taxed at 5 percent GST without tax credit from the current 12 percent with credits.

Brokerages, however, didn’t share the sentiment, saying that the rate cuts won’t benefit all real-estate developers equally.

What Brokerages Said About GST Rate Cut

Deutsche Bank

  • GST rate cut is incrementally favorable for Mumbai and NCR developers versus Bengaluru-based.
  • Changes favorable for developers in high land price cities as opposed to lower land prices.
  • Intended sector revival to support cement, housing finance and steel companies.
  • Direct impact of announced changes likely to be limited for most listed companies.
  • Effective tax difference between current and proposed rate is not significant.
  • New taxation helps the larger unorganised segment.
  • Should help growth revival and employment generation momentum in coming months.

Bank of America Merrill Lynch

  • Move would lead to a marginal pick up in sales velocity.
  • Developers passed through GST tax benefit to customers to push volumes.
  • Revised GST to impact developer margins by 100-400 basis points.
  • Analysis suggests that Mumbai-based developers will be least impacted (100 bps).
  • Margins of Bengaluru/NCR-based developers could be impacted by 200-400bps.
  • DLF is unaffected by GST rate as it sells apartments only after completing the construction.
  • Oberoi Realty’s Thane project will not qualify for 1 percent GST for affordable housing project.

JM Financial

  • No input tax credit will impact projects with high input credit (low land cost) resulting in lower margins.
  • More clarity is required for players with unutilized input tax credit.
  • GST rate cut doesn’t imply price cut from developers.
  • Believe developers have limited headroom to take a price hike post GST rate revision.
  • Lower GST and exemption for development rights from GST benefits Mumbai developers.
  • Developers in other geographies to either raise prices (risk demand) or maintain prices.