Should you buy an under-construction property in India? Is it better to purchase a ready property where you get immediate possession and control your house from the very first day?
Ready Properties Have Limited Market Risk
Real estate in India is going through a very turbulent phase over the past few years. In 2017, the real estate segment has faced even more severe crisis owing to demonetization, Goods & Services Tax and RERA (Real Estate (Regulation and Development) Act). A lot of builders are going bust, and face serious problems. Buyers in apartment projects by such builders are facing a real challenge and risk of their hard-earned money.
In Delhi-NCR, the market conditions are particularly bad for real estate. Most of the residential projects are delayed by several years and buyers are languishing without any speedy recourse to remedy. As the market dynamics has put the developers here in a tight spot, the construction of these projects are delayed due to lack of funds.
Execution Risk for Under-Construction Properties
So far, the Indian property market relied on funds raised from homebuyers to undertake construction work. As there are not many buyers for under-construction properties, funds are hard to come by. This means the projects are stalled at various stages or the construction is happening at a very slow pace. A delay in delivery of projects is further dampening the buyer confidence and plummeting the sale of properties further. This effectively has brought the real estate market in Delhi-NCR to a grinding halt.
All under-construction properties have become a risky bet as there is no guarantee towards the completion timeline. Even where the building structures are ready, the developers are unable to handover possession to buyers due to lack of funds to complete the rest of the development work. Also, slow sale of unsold inventory means the progress of the development gets hampered. Several projects can be seen stuck at various stages of development.
Higher GST Tax on Under-Construction Properties
With a higher GST of 12% applicable on under-construction properties, the effective cost of properties has gone up significantly. There is an input-tax credit system for GST. Which means any GST taxes already paid for a development project would get offset against the GST liability of the developer. This brings down the effective price of the properties and this negates any significant increase in property prices. However, it is a tricky situation in the transition stage. Why?
In the transition period, the input-credit against previous taxes cannot be easily accounted for. This means the tax component gets increased. Many developers have reduced their prices to accommodate the higher tax, but at many instances the increase in prices can be seen.
Ready Properties Have Limited Risk
A property that has already been ready with the requisite approvals, sanctions and certificates is better than under-construction properties as far as risks are concerned. First, you do not have any uncertainty in terms of delivery. You can start living from the very first day. This also saves you from the dual-cost of paying rent and house loan repayments. In addition, there is no GST (Service Tax) on ready properties. There is no execution risk either, which has marred the existing real estate market in most of the major cities in India. You have to pay a higher price for ready properties, but this also comes with the peace of mind.