Will Rising Ready Reckoner Rates Halt Property Transactions At Nariman Point?

Major companies in India's financial capital Mumbai have been slowly moving their head offices from the old central business district (CBD) of Nariman Point to the new one of the Bandra-Kurla Complex (BKC) . This is not too surprising because BKC has far more people living in its 25-kilometre radius than Nariman Point.

Many economists had initially thought the government's attempt to make BKC the new CBD of Mumbai would fail. Their assumption was based on the theory that attempts to build cities generally fail. 

Facts, however, present a different picture. Sales of office premises at Nariman Point are not happening often enough. Industry experts claim that ready reckoner rates in the city's de facto CBD are higher than market rates. (Ready reckoner rates are the market value of real estate as decided by the government.) According to them, the market rates of properties were Rs 26,000 to Rs 32,000 per sq ft, while the ready reckoner rates are about Rs 48,000 per sq ft. This is why property owners are now leasing out office space in the area instead of selling.

Nariman Point landlords were hoping that the government would keep the ready reckoner rates unchanged. But when the Maharashtra government recently decided to raise the ready reckoner rates by seven per cent, it came as a crude shock. The move is expected to affect properties in Nariman Point, Bandra and other suburbs.

Apart from the fact that high rates prevent transactions as they are no longer profitable, it also leads to a fear among property owners that they might be accused of undervaluing properties. How much did this contribute to companies moving to BKC?

It seems a perfectly reasonable decision to lease out properties when ready reckoner rates are higher than market rates. Historically, ready reckoner rates are rarely close to market rates. Even if property owners sell assets at a rate lower than market rates, they will still be expected to pay capital gains tax at ready reckoner rates. This is a major barrier. Many, for example, believe that if the government abolishes stamp duty, people will not undervalue properties. However, so long as the capital gains tax exists, this will not be true.

Curiously enough, rent-control norms artificially lower the price of property, making the rental markets dysfunctional. By artificially raising the value of property, high ready reckoner rates raise the value of property.  As real estate markets have been stagnant for about two years, the recent raise in ready reckoner rates may hurt the markets even more. Industry insiders rightly point out that the actions of the government are not consistent with their goal of making housing affordable for all.

For one, the rise in ready reckoner rates does not take the market reality into account. Even if the ready reckoner rates are set according to market rates, taking an average of the transaction values, there will still be many properties that are below the average rate. While it is not clear how much this has contributed to companies moving to BKC, it certainly hurts real estate markets.