Transaction Costs in Housingproperty.magicbricks.com/microsite/crisil/nhb-transaction-cost-analysis-report-final...The National Housing Bank (NHB), the apex level financial institution

Report on Transaction Costs in Housing

MagicBricks Study for NHB

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__________ India's No.1 Property Site __________

Transaction Costs in Housing May 16, 2007 DISCLAIMER: The information in this document and all annexure are confidential and intended solely for the addressee, in this case NHB. The data analysis is based on research across multiple sources of brokers, developers, development authority, end users and professionals such as lawyers, Transaction Experts, CAs. The analysis done by MagicBricks may be taken as an indicative and MagicBricks takes no responsibility either for accuracy of this data or authentication of it since it is from unstructured sources.



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CONTENTS

INTRODUCTION .......................................................................... 3

RESEARCH METHODOLOGY ..................................................... 4

TRANSACTION COSTS IN HOUSING ......................................... 7

DEVELOPMENT AUTHORITY OR DEVELOPER: ................ 7

BROKER: ........................................................................................ 8

BANKS OR HOUSING FINANCE COMPANIES (HFCS): .... 12

DEVELOPMENT AUTHORITY: ................................................ 16

DEVELOPER: .............................................................................. 20

CONCLUSION ............................................................................ 23

RECOMMENDATION ................................................................. 28



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INTRODUCTION

The National Housing Bank (NHB), the apex level financial institution for the housing sector in the country, which works as a facilitator in promoting Housing Finance Institutions and providing financial and other support to such institutions, has retained the services of MagicBricks, The Times of India Group's real estate portal, to analyze the 'Transaction Costs in Housing" in India. The following document is a research report on Transaction Costs in Housing which provides data across 16 cities in the country (6 Tier 1 cities, 6 Tier 2 cities and 4 Tier 3 cities). The document analyzes the transaction expenses incurred by the buyer to various stakeholders in the process of purchase of a residential property. These stakeholders include the broker, the developer, the development authority, the housing finance institutions, municipal and state authorities, service providers such as lawyers, chartered accountants and investment advisors. The data has been gathered across segments and cities through primary data collection methods. All sources contacted in the phase 1 have been individually contacted and their responses recorded and added as annexure. However, this data was counter checked from a large number of sources and this is reflected in the source column of the datasheets. The data has then been analyzed to arrive at the conclusions at the end of the report.



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RESEARCH METHODOLOGY

OBJECTIVE: The National Housing Bank wants data on Transaction Costs in housing across segments and cities. For the purpose of this study a medium value purchase across cities has been selected for analysis. This segment was chosen as this is a more structured segment of the real estate market and credible data could be sourced in the limited time frame provided. The stakeholder groups contacted include developer, broker, development authority, banks and service providers as well as end users through telephonic, e-mail and online surveys in a pan India sample which is representative of Tier 1, 2 and 3 cities. TERM OF THE STUDY: The tenure of the study was 8 days from 26th March to 2nd April. However, MagicBricks had already conducted user and stakeholder surveys from March 16th, 10 days prior to the official start of the tenure of the project. SCOPE OF THE STUDY: The study of transaction costs in housing includes: Transaction Costs payable to the Development Authority:

Stamp Duty, Registration Fee, Leasehold to Freehold Conversion Charges, Transfer & Mutation and External Development Charges.

Transaction Costs payable to the Broker: Broker’s Commission, due diligence and document preparation charges

Transaction Costs payable to the Banks/Housing Finance Companies: Loan Interest rate, Processing Fee, Legal Fee, Valuation Fee, Property Insurance

Transaction Costs payable to the Developer: Parking charges, maintenance, society transfer charges. Water and electricity charges are collected by developer and deposited to the development authority.

Transaction Costs payable to the Service Providers such as Lawyers, Consultants, Deed writers, Maintenance agencies

METHODOLOGY: MagicBricks team conducted survey across six Tier 1 cities, six Tier 2 cities and four

Tier 3 cities. The cities surveyed include the following:

Tier 1 Tier 2 Tier 3

Delhi Ahmedabad Lucknow

Mumbai Chandigarh Kochi

Chennai Indore Jaipur

Bangalore Ludhiana Coimbatore

Hyderabad Bhubaneswar

Kolkata Pune



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The data has been gathered across segments and cities through primary data collection methods. All sources have been individually contacted either telephonically, via e-mail or through online surveys and their responses recorded. Efforts have been made to contact the most authentic sources in the public and private sectors. A random sample method was used to select brokers and developers. Please refer to Annexure 1 for Developer, Annexure 2 for Brokers, Annexure 3 for Banks & HFCs, Annexure 4 for Development Authorities and Annexure 5 for end-users. This data was fed into data sheets and analyzed to draw parallels and differences between cities. All conclusions have been made on the basis of primary proprietary data collected as mentioned above. While collecting the information it was observed that there was no one authentic source of information. Information available on authority websites was outdated or incorrect in many instances and even the designated spokespersons could not provide the requested information. Therefore, informal sources had to be used and a multiple check was done on the same in Phase 2 of data collection. There is no commonality of nomenclature of charges across cities. Charges such as stamp duty and registration are often clubbed together as levies. Even at the authority or the broker level a clear distinction between the two was often difficult. Neither the collector nor the payee was aware of the published values. Different cities operate on different norms of property units and in bringing them to a common unit value there maybe slight discrepancies of conversion. Market realities as they are present today have been thrown up in vivid detail in the analysis. On the basis of this analysis, conclusions have been drawn and recommendations made.

ASSUMPTIONS: For the purpose of this study following were assumed:

1. The medium value of houses in Tier 1, 2 and 3 was taken as Rs.60 Lacs, Rs.40 Lacs and Rs.30 Lacs, respectively.

2. The size of property was taken as 1800 Sq. Ft or 200 Sq. Yards or 167Sq. Mtrs. 3. All unit conversion have been done magic bricks area calculator,

http://magicbricks.com/property/faces/jsp/common/areaCalculator.jsp. 4. All calculation of EMI have been done using HDFC EMI calculator,

http://www.hdfc.com/Calculator/emical.asp?Mode=Cal, which operates on the monthly rest principle.

5. For the purpose of calculation of EMI, the loan component is assumed to be 85% of the total cost, which is generally the maximum that banks offer. Since interest rates have been fluctuating across last year an average interest rate of 10.0% for tenure of 15 years has been assumed.

6. The processing fee, legal fee, valuation fee and property insurance fee are taken as constant across cities as these are standard charges levied by banks and do not vary city to city.

7. For the calculation of stamp duty an average value has been taken as in many cities the stamp duty charges are different for men and women. However, the charges for men and women have been listed separately in the data sheet.

http://magicbricks.com/property/faces/jsp/common/areaCalculator.jsp

http://www.hdfc.com/Calculator/emical.asp?Mode=Cal



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8. For the computation of stamp duty ‘value of property’ or ‘consideration’ or ‘cost of land’ all are considered to be the house value.

9. The Delhi region is unique in that the sub cities of Gurgaon, Noida, Greater Noida, Ghaziabad and Faridabad function as one region – NCR. However, Stamp duty, Registration, Leasehold to Freehold conversion charge and Transfer & Mutation charges follow that of the respective states. In the data sheet the aforesaid charges have been computed on the basis of those applicable in the National Capital Territory of Delhi. However, charges paid to developers reflect those prevailing in the National Capital Region.

10. EDC or the External Development Charges are charged by authorities on developers for provision of offsite services and infrastructure. This recovered by the developers fro the end users as EDC charges. This is extremely evolved as a system in Haryana where private consolidation of land by developers has been encouraged. Any developer who develops and markets a township takes the onus of the provision of onsite infrastructure in-house but collects EDC for external development of infrastructure. These charges are available for the Delhi NCR but in other cities these could not been ascertained from credible authorities. It has therefore been included only in the Delhi region.

LIMITATIONS: 1. The entire exercise is based on a telephonic and E-mail spot survey over 10

days and a 3-day verification of the same. Physical verification of data was not part of the scope of report.

2. The data provided by the authority has been assumed to be updated and correct. However, wherever possible the data has been counter checked with private market players.

3. Data pertaining to the Orissa market has been gathered from a few available sources and the same could not be counter checked from the authorities due to lack of response.

4. Due-diligence and document preparation charges have been clubbed together as most brokers offer this service as a composite service. It was found difficult to segregate the cost and arrive at authentic values.

5. The transfer and mutation fee have been clubbed together for the purpose of computation.

6. The costs do not include miniscule sundry charges.



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TRANSACTION COSTS IN HOUSING

In India, the purchase of residential property is done in the following ways:

1. Purchase from the Development Authority- Direct Sale 2. Purchase from the Developer/Builder- Original Booking 3. Purchase through a broker – development authority property re-sale, developer

property re-sale 4. Purchase from Co-operative housing societies

Any person who purchases an immovable residential property has to pay certain charges, over and above the cost of the property, to the broker, the banks or the Housing Finance Companies (HFCs), the development authority and the developer. We will refer to this person as end user henceforth in the report. The end user pays a certain amount to the stakeholders in the process of purchase of his residential property. The stakeholders include the following: A flowchart of the transaction that a consumer incurs has been attached as Annexure 6.

DEVELOPMENT AUTHORITY OR DEVELOPER:

Real estate, hospitality, and construction companies must constantly prioritize and address numerous issues in their business environment, including regulatory changes and shifts, complex international tax demands, as well as other finance-related risks. Responding to these challenges requires industry and technical knowledge, as well as entrepreneurial thinking. As the primary source of the development, the authority or the developer fixes the cost of the property. This would factor in the cost of land, the cost of input materials in construction, the service charges and taxes paid directly and indirectly by the developer, including value added tax (VAT), sales tax, works contract tax, service tax and cess. This is the agency that determines the primary values and therefore sets price norms in the market.



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BROKER: One concern that drives many people to hire a real estate agent is the volume and complexity of the paperwork involved. It can therefore be very helpful to have someone familiar with the process to deal with it. Other parts of the transaction will be happening quickly too -- hiring inspectors, negotiating over who pays for needed repairs, and the like -- all of which is second nature to an experienced agent. What's more, experienced real estate agents usually have contacts with good inspectors, mortgage loan brokers, and others who can make the buying process easier. A real estate agent is called by different names in different markets such as broker/ advisor/ consultant/ intermediary etc. A real estate broker is a party who acts as an intermediary between sellers and buyers of real estate and attempts to find sellers who wish to sell and buyers who wish to buy. In organized real estate markets, brokers are duly licensed and can operate as real estate advisors only after rigorous training and passing exams leading to certification. The Indian market is devoid of any regulations for brokers and anyone can function as a broker/real estate agent. In the absence of such regulation, the end user has no means to assess the competence of the broker. Real estate brokers and their agents assist sellers in marketing their property and selling it for the highest possible price under the best terms. When acting as a Buyer's agent with a signed agreement (or, in many cases, verbal agreement), they assist buyers by helping them purchase property for the best possible price under the best terms. They show the buyer various options and if the buyer selects one property it is called ‘closing a deal.’ There is no clear demarcation between tenant representation and landlord representation in India. Often multiple brokers are seen marketing the same property. This again points to a lack of regulation of brokers. One can of course save money by acquiring or disposing real estate assets by oneself, without using an agent. Typically agents earn a certain percentage of the selling price or rental value and sellers and tenants feel that if they do it on their own that money could be saved. In many cases the hesitation in selecting a broker comes from the fact that there are no yardsticks to determine the efficiency of the brokers. However, for the majority of people including corporate houses, hiring an agent is well worth the money spent. An agent has many responsibilities that a person may not think about before choosing to do it on his/her own. A competent agent can do much more than find the right space at the right location at the right price. However, the number of services packaged within the brokerage fee varies from city to city and broker to broker. If the real estate broker closes a deal for an end-user, this is the first cost that an end-user bears in the life cycle of purchase of a property - this is called the broker’s commission/cut/fee. When the real estate broker closes a deal for an end-user, he charges a commission which varies 1% to 2% in medium scale transactions and 0.5 to 1.5% in high-value transactions varying from city to city. The chart below gives an overview of broker fee in select cities across the country. A medium scale transaction in a metro/Tier 1 has been assumed to be upto Rs.60 lacs, in Tier 2 city upto Rs.40 lacs and in Tier 3 city upto



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Rs.30 lacs. A high value transaction in a metro is Rs.1 Cr onwards, in Tier 2 city Rs.75 lacs plus and in Tier 3 city, Rs.60 lacs plus.

Broker Fee across Cities in India

Broker's Fee

City Low to Medium Scale Transactions Hi-value Transactions

Delhi 2% 0.5- 1%

Mumbai 2% 0.5- 1%

Chennai 2% 1%

Bangalore 2% 1%

Hyderabad 2% 1%

Kolkata 2% 1%

Ahmedabad 2% 1%

Chandigarh 1% 0.5%

Indore 2% 1%

Ludhiana 2% 1%

Bhubaneswar 2% 1.50%

Pune 2% 1%

Lucknow 2% 1%

Kochi 1% 0.5%

Jaipur 2% 1%

Coimbatore 1% 1%

This percentage isn't cast in stone, however. For example, the seller might negotiate the percentage down if the house is particularly expensive. (And in probate sales, the court sets the commission.) This commission is paid to the agent at the time of execution of the Sale/Lease/License Agreement or Deed of Sale/Lease (when the full purchase prices are being paid) or when the possession of the said property is delivered, whichever is earlier. In case of rent/lease/license the Lessor/Licensor would pay brokerage equivalent to one month rent / license fee. Even an agent, who represents only the buyer, and not the seller, has a financial interest in seeing the deal go through because most agents are paid by commission and won't see a dime unless you buy the house. Experienced, reputable agents won't let this interfere with their advice. They're more concerned with their professional reputation and long-term ability to attract clients. However, this conflict of interest may cause less scrupulous agents to insist that the buyer will never get the house unless he bids high, to recommend home inspectors who make light of potential problems, and to otherwise compromise the interests. This is just another reason to regulate the broker/agent market and provide the user yardsticks to measure the efficiency of the agent. The buyer is also looking today for standard values to judge the pay out to brokers and the services that can be demanded. The chart given below was compiled a few years ago by a team of researchers across universities in the United States. This shows a wide discrepancy in broker commissions across the world. The Indian norm of 0.5-2% is well below global standards. What is



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required therefore, is simply to list the broker’s responsibilities, educate him and the consumer on the same and also to regulate them against malpractices.

International Commission Rate Comparisons

Country License

Real Estate Transaction Characteristics

Argentina** Yes 6%, where 3% paid by the buyer, and 3% paid by the seller; does not require buyer broker.

Australia Yes 5% on the first $18,000, 2.5% -thereafter; also properties are sold through auction system; advertising is provided by real estate agent.

Belarus n/a 6%-15% commission, averaging near 10%. Public information is scarce.

Belgium Yes 3% commission.

Brazil Yes 5% commission, less on a higher priced units.

Canada Yes 3-6% commission rate. An agent handles on average 3 to 5 sales per year.

Caribbean*** Yes 5% - Jamaica, 3-5% - Trinidad & Tobago.

China** & Hong Kong

Yes No set regulations and standards for real estate transactions in China. Commission fees vary from 5% to 10%. Also, there is 15% real estate transfer tax. However, Hong Kong province has significantly lower real estate brokerage fee typically 1% for the seller. Hong Kong does not require dual representation and one agent may deal with both the buyer and seller. However, both parties typically have separate lawyer representation. In Hong Kong, the maximum transfer tax is 3.75%.

Denmark** Yes 2-4%, buyer pays 25% of sales price transfer tax; advertising is provided by real estate agent.

Finland n/a Fees run about 5% of the sale price on condos and 3%-4% on single family homes. Higher priced houses have lower commission fees. The government collects a value added tax (22% of the selling price).

France** Yes Only 50% of property sold is listed with a real estate agent; real estate transactions are kept very private; 50% of the real estate is sold by owner.

Germany n/a Negotiable commission rate that varies from 3% to 6%.

Greece n/a 4% commission rate, where the buyer and seller are responsible for 2% each. Also, there is a 12% value added tax on a real estate transaction.

Indonesia** No 5% paid by either buyer or seller, but not both; a buyer’s broker is required for real estate transactions.

Ireland** Yes In cities 1.5-2%, and small towns 2-3%; also properties can be sold through auction system.

Israel Yes 4% commission rate equally split between buyer and seller agents.

Italy** Yes Paid by both buyer and seller: each party pays 2-3%.

Japan** Yes 3% commission rate.

Malaysia** Yes 3% on the first $100,000 and then 2% of the remaining amount of the sale, commission is paid either by buyer or seller, not both.

Mexico** Varies 5-10% commission rate. Large emphasis on MLS.

Netherlands** Yes 1.5-2%, broker represents either the buyer or the seller but not both. The seller pays the fees.

Norway** Yes 2-3%, broker represents both parties in the transaction.

Philippines** Yes 5%, broker represents either the buyer or the seller but not both.

Russia Yes 5% to 10% but "net listings" are common; advertising is provided by real



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estate broker/agent; FSBO very common; Buyer broker representation is not required. Some commissions are set in dollar or ruble fee amounts. Reliable market information is difficult to acquire.

Singapore Yes 1.5-2.0%, FSBOs are very rare; buyer broker representation is not required.

Spain Yes Commission rate depends on the property location, averaging 5% of total estate price.

Sweden** Yes 5%; commission is paid by seller. 10% commission is typically charged for lower priced units.

Thailand n/a Commission rates vary from 3% to 5%.

United Kingdom

Yes 1%-2% is typical; in very competitive areas 0.5-0.75%; in low priced areas as high as 3.5%. Advertising is provided by real estate broker/agent; buyer broker representation is not required.

United States Yes 6%-7%; advertising is provided by real estate broker/agent; in 1999 Some real estate agents charge flat fees that run 2 to 4 percent. Auctions are increasing but usually at the same fees or higher as normally charged by the brokerage firm involved.

Source: International Real Estate Review * This number is calculated as Total home sales in 1999 (according to NAR Profile) was 6.5 million. According to NARELLO, in 1999, there were 515,225 active real estate brokers and 980,083 active real estate agents. ** Information is obtained from http://onerealtorplace.com *** Jamaica, Trinidad and Tobago. Data was also confirmed through the network of academicians and practitioners attending Real Estate Conferences in 2001.

http://business.fullerton.edu/finance/irer/papers/past/vol5_pdf/012_039US.pdf



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BANKS OR HOUSING FINANCE COMPANIES (HFCS): Given the varying property prices that exist within a city it becomes necessary to ascertain the quantum of funds that one would have to organize depending on the location and area requirement. Apart from an individual's savings and assets, given the property prices today, it becomes necessary for almost everyone to organize additional funds. These funds may come in the form of borrowings from various sources like Housing Finance Institutions, Banks, Provident Fund, Employer, Relatives or Friends, etc. The second step in the lifecycle of purchase of residential property is getting the property financed. End users compare interest rates of various banks and HFCs and start applying for home loan to the bank/HFCs. Even banks and HFCs have certain guidelines to help determine the home loan eligibility for individuals. They assess the customer’s repayment capacity while deciding on the home loan eligibility. Repayment capacity is based on factors such as income, age, qualifications, number of dependants, spouse's income, assets, liabilities, stability and continuity of occupation and savings history. Once they okay the case, the banks/HFCs come up with Equated Monthly Installments (EMIs) comprising principal and interest value to be paid each month by the end-user till the completion of the stipulated tenure of 5/10/15/20 years. Repayment by way of EMI commences from the month following the one in which the end-user takes full disbursement. The bank or HFC charge to the end-user is Step II in the lifecycle of transaction costs in housing. The end user is charged the following by a bank/HFC:

Pre EMI: Pending final disbursement, the end-user pays the interest on the portion of the loan disbursed. This interest called pre-EMI interest. Pre-EMI interest is payable every month from the date of each disbursement up to the date of commencement of EMI. There are no tax breaks on the pre-EMI component. Therefore it does not contribute to the tax savings of the individual.

Loan Interest Rate: This is the interest on the principal amount compounded over the home loan tenure period and payable as part of the EMI every month. The home loan interest is the second and a major expense incurred by the end-user in the purchase of a property. The Interest rate may be a fixed rate (one which is not impacted by the money market conditions) or floating (with money market conditions). However, with the revision of bank interest rates practically every quarter in the last one year, banks have started offering floating interest rate and they offer fixed rate only if the end-user wishes. The banks’ logic is that even the fixed rate of interest is fixed only for a maximum of 3 years. So it is better to offer the floating rate which is always lower than the fixed rate of interest. MagicBricks offers an interest rate comparison chart across banks and HFCs. http://property.magicbricks.com/financially_speaking/bankloanchart.html.

http://property.magicbricks.com/financially_speaking/bankloanchart.html



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Currently the floating rate of interest varies from 8.75 to 10.75% while the fixed rate of interest varies from 10% to 12.5%. For the purpose of calculating the Loan component the rate of interest is taken as 10% for 15 year tenure. The EMI is calculated using HDFC’s EMI calculator. http://www.hdfc.com/Calculator/emical.asp?Mode=Cal

0

5

10

15

Bank of India PunjabNational Bank

HDFC ICICI LIC HousingFinance

HSBC

109.75

11.25

10

12

10.25

13

11 11

10

11.5

10.75

Fixed Rate

Floating Rate

Bank Loan Chart

Banks

Survey conducted by MagicBricks.com

Ra

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f In

tere

st

Processing Fee: To avail of a home loan the end user needs to shell out money by way of processing fee, also called Upfront Fees or administrative fees. Although these fees are low as compared to the quantum of loan but at times they appear significant (especially in case of big ticket loans). These expenses go towards the initiation of the loan process. This one-time charge is based as a percentage of the loan amount. These days the processing fee is 0.5% for most banks. The pre-payment penalty is 2% of the outstanding loan across all public and private sector banks in India except multinational banks which charge a penalty of 5% such as Citibank, ABN Amro.

http://www.hdfc.com/Calculator/emical.asp?Mode=Cal



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0

0.2

0.4

0.6

Bank of India PunjabNational Bank

HDFC ICICI LIC HousingFinance

HSBC

0.55

0.5 0.5 0.5 0.5 0.5

ProcessingFee

Bank Processng Fee

Banks

Survey conducted by MagicBricks.com

Pro

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ssin

g F

ee

(%

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nt)

Legal Fee: Buying a home will probably be the largest and most significant

purchase one makes in one’s life. It also involves the law of real property, which is unique and raises special issues of practice, and problems not present in other transactions. A real estate lawyer is trained to deal with these problems and has the most experience to deal with them.

Prior to a property purchase, it is advisable to satisfy oneself by having a solicitor check the original title documents to that property. If the title were not clear and marketable, most of the major financial institutions would refrain from giving a loan to this property. Hence, as an additional measure, one could approach a financial institution to check if it would provide a loan for that particular property. The bank would probably have checked all the documents pertaining to the property. If a loan is being advanced /granted, the lending institution would have checked the veracity of the papers before taking mortgage of that property. The end user pays a legal fee to the bank to pay for the lawyer/advocate on the panel of the bank who clears the title of the property. The legal fee ranges from Rs.500-5000 depending upon whether it is direct allotment by the development authority, re-sale, second or third sale and other factors such as the popularity of the lawyer. At Bank of India, for direct allotment by DDA, Huda, GDA or any authority, there is no legal fee. At PNB, this amount ranges from Rs.500-700, depending upon the nature of work. For instance, if it is a direct allotment by the DDA, the



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documentation is minimal and the charges are Rs.500. Wherever the cases are complicated the amount goes up to a maximum of Rs.1000. At HDFC, it ranges from Rs.700-4000 and for refinance, it is Rs.700, for resale it is Rs.1700 and it may go up to a maximum of Rs.4000. In certain banks such as ICICI and HSBC, the administrative fee which is 0.5% of the loan amount includes legal and valuation fee. Again at LIC Housing Finance Ltd, the processing fee of 0.5% of the loan amount includes the Advocate’s Fee, Valuer’s Fee, Inspection Charges and Financial Investigation.

Many end-users, be it Purchasers/ Leases/ Licensees, often have their own Solicitors/ Law Firms prepare an elaborate Title Report over and above the report of the lawyer empanelled with the Lending Banks, as an additional security. Reputed Solicitors/ Law Firms normally charge by the hour, at rates ranging from Rs.1000-5000. One may also find Lawyers/ Firms who charge flat fees (upto 1 to 1.5% of the transaction costs) for specific services, such as preparing documents and doing the Title Verifications.

Valuation Fee: This is the fee that the loanee pays to the architect and ranges typically from Rs.500-1000 and for very high value transactions, it’s up to Rs.2000. While PNB and BOI charge this separately, many other banks such as HSBC, ICICI, LIC Housing Finance include this in the processing fee of 0.5% of the loan amount.

Insurance Charges: Most banks do not provide insurance coverage to property

and life of loanee. However in some cases such as PNB, property insurance is compulsory and life insurance is optional. In property insurance, the bank charges Rs.404 per lac to safeguard it against earthquake and natural disasters. This also covers accidental personal coverage. For life insurance, PNB has a tie up with Tata AIG and the loanee has to pay a lump some of Rs.20,000 as a one-time premium.



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DEVELOPMENT AUTHORITY: Having taken the loan from the bank/HFC and deposited the cheque from the bank to the developer/owner of the property/development authority, the end-user pays a certain amount to the development authority as dues:

Stamp Duty: Stamp Duty is a tax, similar to sales tax and income tax collected

by the government, and must be paid in full and on time. A stamp duty paid instrument/document is considered a proper and legal instrument/document. It gets evidentiary value and stands scrutiny in courts. The stamp duty varies form 3% to 12% across cities. In certain states, there is a rebate for registering the property in the name of a woman.

Registration Charges: In many states in India, the Agreement for Sale between the seller/builder and purchaser is required to be registered by law. The end-user in his own interest must lodge the Agreement for registration within four months of the date of the Agreement at the office of the Sub-Registrar appointed by the State Government, under the Indian Registration Act, 1908. Registration acts as a proof that a transaction has taken place. The registration of a document serves as a notice of the transaction to the persons affected by the transaction. It also serves as an implied notice to any person subsequently acquiring interest in the property, covered by the registered document. When a document, which is to be



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compulsorily registered, is not registered, it fails to confer any title given by the document. The real purpose of registration is to ensure that every person dealing with property, for which compulsory registration is required, can confidently rely on the statement contained in the register as being a full and complete account of all transactions by which the title may be affected. The Registration fee varies from 0.5 to 3%.



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Stamp Duty across Cities in India

Stamp Duty across Cities in India

Men Women Registration Fee

Delhi 5% 3% 3%

Mumbai 5% 5% 1%

Chennai 8% 8% 1%

Bangalore 8.40% 8.40% 1%

Hyderabad 7% 7% 0.50%

Kolkata 6% 6% 0.50%

Ahmedabad 4.90% 4.90% 1.10%

Chandigarh 6% 6% 1.00%

Indore 10.40% 8.40% 0.8%

Ludhiana 9% 8% 1%

Bhubaneswar 11% 11% 2%

Pune 5% 5% 1%

Lucknow 10% 10% 1%

Kochi 12.0% 12.0% 2%

Jaipur 6.50% 6.50% 1%

Coimbatore 8% 8% 1%

Stamp duty rates are very high and uneven across all States. India has the highest stamp duty rates in the Asia-pacific region. Stamp duty rates are extremely high compared to global standards of 1-2% (Please see graph below) and impacts costs significantly.

*Source: Government websites

Global Stamp Duty Rates

0%

2% 1.50%

0.50% 1%

2.25%

8%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

USA UK Europe Thailand Malaysia Hong Kong

India



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Due-Diligence and Document Preparation Charges: Such charges typically

involve due-diligence of charges, vetting of property papers by legal experts to

check the authenticity of titles. Document preparation charges basically involves document drafting charges payable to the advocates/lawyers, liaisoning expenses incurred with the Govt. authorities. These are usually collected on a lump sum basis. The charges vary from Rs.1,250 to Rs.12,500 across cities in India. The higher the value of transaction, the greater are the charges to be paid.

Leasehold to Freehold Conversion: Leasehold properties (plot/built-up) are

those in which perpetual leasehold has been granted by the title paramount in favor of the lessee. In such properties, the title paramount, i.e. President of India acts through DDA, L&DO, and Leasehold properties are not freely transferable. Depending upon the covenants of the lease deed, prior permission of the lessor (DDA/ L & DO) is required to transfer the property. Freehold properties are those where title paramount has conveyed the property in favor of the purchaser by conveyance/sale deed with no restriction on the right of the holder of the property to further transfer the property. Record of ownership of the freehold property can be ascertained from the office of the sub-registrar. It can be transferred by registration of sale deed. For conversion of leasehold to freehold, there are different norms across states in India. Eg. in Punjab, Haryana, Kerala, Tamil Nadu everything is freehold. Also almost everything is freehold in the cities of Kolkata, Bangalore and Indore. However, there is no freehold in Rajasthan. Annual lease rentals have to be paid to the Authority which is equal to 2.5% of the Reserve price of that area (which is lower than the market value). In Lucknow, the structure has been changed after 1995. The conversion charges are 12% of the sum at which plot is acquired. In Mumbai, there is no conversion, only renewal of the 99 years lease. In Delhi, as per circle rates which vary from one locality to the other. The prevailing circle rates for conversion for Delhi have been attached as Annexure 7.

Transfer & Mutation: Transfer of property/title from one entity/person to other through the office of the sub-registrar (by way of registration of the absolute sale deed/conveyance deed/lease deed), after payment of requisite value stamp duty. Once the property is transferred, it is also to be noted in the concerned municipal authority records, which is termed as a Mutation Record / Khatha record. This means that the property now stands in the name of the new transferee. In southern cities, there is also a document which is called the Encumbrance Certificate (EC), which clearly depicts the history of transfers of a said property. The charges vary from city to city and there is no fixed formula for this. These charges can go upto 2% of the cost of property.



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DEVELOPER: The next set of charges are paid by the end-user to the developer - society transfer charges, parking lot purchase charges, the maintenance fee advance, the water meter charges paid at the time of possession, the electricity meter/electrification charges, etc.

Society Transfer Charges: This fee is an amount charged by the society to the

person selling his apartment or the person buying an apartment in the society. At the time of transfer, the transferor is requested to give a letter to the society stating that he is giving the donation as a voluntary contribution towards the common amenities fund, maintenance fund or major repairs fund, and that he has instructed his accountant to reflect the same as a voluntary contribution in his books of accounts.

Model Bye-Law No 40(d)(v) of co-operative housing societies as approved by the commissioner for co-operation under the Maharashtra Co-operative Societies Act, 1960 provides for payment of a transfer fee of just Rs.50 by the transferor-member to the society. Also, sub-clause (vii) of the Model Bye-Law No 40(d) provides for a payment of premium at a rate to be fixed by the general body meeting not exceeding 2.5 per cent of the difference between the book value of the flat and the price realized by the transferor on a transfer of flat or Rs.25,000, whichever is less. It also imposes restrictions on accepting an amount exceeding Rs.25,000, whether by way of donation or otherwise, unless it is paid voluntarily by the member. However, today the transfer fees are not restricted to an amount of Rs.25,000. It fact, there are no guidelines for societies to follow. The amount is fixed by passing a resolution at a special general body meeting of the society. It is paid at a fixed rate per square foot or as a lump-sum. Society Transfer Charges typically range from Rs.20,000 – Rs.2 lacs with highest being in Delhi NCR.

Parking Lot Charges: The parking lot charges are charged by the developer to the end-user. They vary from Rs.50,000 to Rs1.5 lacs in Tier II cities such as Pune to Rs.1.5 lac to Rs.2.5 lac in Tier I cities such as Delhi NCR and Mumbai. There are other variables such as extra charges for covered parking or parking in the basement. For more details on exact parking charges, please refer to Annexure 1.



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Maintenance Fee: Typically developers only charge a monthly maintenance fee

that ranges from Rs.300 to Rs.6000 per month. Many developers prefer to charge a year’s monthly maintenance fee in advance in a lump-sum while a few charges the end-user for creating the maintenance infrastructure such as Supertech in Greater Noida project have charged the end user a sum of Rs.40/ Sq. Ft.

Water Meter Charges: This charge is included in the cost of the property and

most developers do not charge water meter charges in advance but some charge depending upon the charges by the Corporation. It ranges between Rs.700 to Rs.20,000.

Electricity Charges: Again this charge is included in the cost of the property and

most developers do not charge electricity meter charges in advance but some charge electrification charges. There is no uniformity of electricity charges across cities. Lumpsum payments at the time of purchase may range from as low as Rs.1,000 in Ahmedabad to Rs.90,000 in Delhi NCR.

External Development Charges: This is applicable in Haryana where private

developers consolidate land and provide on-site infrastructure while the state charges External Development Charges for off-site infrastructure.



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External Development Charges (EDC) are usually applicable/collected for a new location development, primarily to provide for basic infrastructure amenities such as drainage, roads, sewage, water, electricity lines etc. These are collected as a lump sum amount or on a per acre or per Sq. M. basis by the concerned authorities, which in turn is distributed pro-rata amongst the individual occupiers by the developers.

http://sq.mt/



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CONCLUSION

Transaction values vary across cities depending on the demand supply gaps and the economic drivers of the city. The quality of development and the add-ons in terms of lifestyle features such as clubs, recreational and entertainment facilities as well as transport networks and access to business districts determine the price points for residential real estate. The transaction analyzed here in the report is a medium value transaction which is typically up to Rs.70 lacs in Tier 1 city, Rs.50 lacs in Tier 2 city and city and Rs.40 lacs in Tier 3 city. Assuming the average cost a medium level property of 1800 Sq. Ft. as Rs.60 lacs in Tier 1, Rs.40 lacs in Tier 2 and Rs.30 lacs in Tier 3 city, MagicBricks has computed the transaction costs across various stakeholders such as broker, developer, development authority, end user and housing finance institutions in the process of purchase of a residential property across 16 cities. The segment has been chosen as it is the most structured category in the market today and authentic data can be procured in this category. A spectrum of parameters have been covered such as Broker Fee, Due-diligence Charges, Buyer' Component, Loan Component, Loan Processing Fee, Loan Legal Fee, Loan Valuation Fee, Property Insurance, Stamp Duty Charges, Registration Fee, Document Preparation Charges, Leasehold to Freehold Conversion Charges, Mutation and Transfer Fees, Parking Charges, Maintenance Fees, Water Meter Charges, Electricity/electrification Charges, Society Transfer Fees and External Development Charges. The data has been collated across primary interviews with developers, brokers, end users, development authority and banks. Transaction costs include the loan interest rate, the stamp duty and other municipal charges for water electricity and other services, the fees paid to service providers - legal and financial, brokerage fees and extras charged by developers for additional services. These often compose a significant component of the outflow to the end user. While purchasing a house worth Rs.60 lacs in a tier I city a user actually ends up paying out over Rs.55-60 lacs more as various costs. This is often ignored by both the consumer and the policy makers while computing real estate costs. It therefore constitutes a significant component of transaction costs. The findings are as below:

In Tier 1 cities, the additional charges are upto Rs.10 lacs and this constitutes 16% of the cost of the property. However inclusive of the loan interest rate compounded over 15 years, the end user pays Rs.58 lacs and this constitutes about 96% of the cost of the property. The major factors contributing to the increased cost are the high developer charges including maintenance, parking, water and electricity costs. Delhi NCR and Mumbai also have high External Development Charges. While stamp duty rates in the city are low, the high registration charges make up for this



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In Tier 2 city, the additional charges are up to Rs.10 lacs and this constitutes 24% of the cost of the property. However inclusive of the loan interest rate compounded over 15 years, the end user pays Rs.41 lacs and this constitutes more than 100% of the cost of the property.

In Tier 3 city, the additional charges are upto Rs.11 lacs and this constitutes 39% of the cost of the property. However inclusive of the loan interest rate compounded over 15 years, the end user pays Rs.35 lacs and this constitutes 118% of the cost of the property.

The brokerage fee is 2% on an average of the cost of the property. It is lowest in Chandigarh at 1% followed by Coimbatore and Kochi. The brokerage fee by far in the Indian market is competitive as compared to its global counterparts. It decreases as the value of the transaction increases and in transactions over one crore, it ranges from 0.5 – 1.5% of the total cost of the property.

The due diligence charges vary from Rs.1,250 to Rs.12,500 with the highest being in Ahmedabad and Chandigarh.

Loan interest rate has been taken as 10% on an average and the processing fee which is 0.5% of the loan component comes to Rs25,500 in Tier 1 city, Rs.17,000 in Tier 2 and Rs.12,750 in Tier 3 city. The legal and valuation fee range from Rs.500 to Rs.5000 while in most cases this is included in the Processing fee.

Stamp duty is the highest in Kochi at 12% followed by Bhubaneswar at 11%, Lucknow at 10% and Indore at 8.4- 10.4%.

While consumers in all cities are required to pay monthly maintenance charges on per Sq. Ft. basis or lumpsum basis. In many cities they are expected to shell out anywhere between Rs.2500 – Rs.1.8 Lacs.

Water meter charges are largely paid by private developers to authorities which ranges between Rs.25,000 to Rs.35,000. This is often not passed onto the end user.

Electricity meter and electrification charges are the lowest in Lucknow and highest in Delhi NCR. It is also very high in Pune and Kochi. This charge doesn’t indicate the quality of supply.

Cities such as Kochi, Ludhiana, Chandigarh, Kolkata, Hyderabad and Chennai do not charge any society transfer fees. However, it is very high in boom towns such as Delhi NCR, Pune and Jaipur.

Comments:

Stamp duty rates are extremely high compared to global standards of 1-2% and these impact costs significantly. Kochi is very obvious example of this. The cost of the house being lower than the Tier I cities does not help the consumer as additional charges amount to a whopping 121% of the cost.

All the factors considered and the rising interest costs of housing loans will push the additional payouts higher to the consumer and reduces affordability. It needs to be offset with some tax or duty incentives to keep the end user in the housing market.

As the private sector offers lifestyle features with houses, the consumer ends up paying heavily for these facilities. Maintenance and parking charges are a significant component of the housing costs and the buyer needs to be sensitized into factoring these costs when allocating funds to purchase a house.

Major contributing factor in the service cost is broker fee which is a percentage of the cost. It does not vary much in the Tier 1 cities. However, in Tier 3 cities wherever the broker fee is a percentage point lower than other cities there is a significant drop in the outflow from the consumer.



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Due-diligence and Document Preparation Charges, being fixed amounts, do not

affect the transaction values significantly. The ratio of financing cost is constant across cities as it is driven by financial

institutions and not by individual city collections. It is only affected by money market conditions. Currently a mid level consumer purchasing a house of 1800 Sq. Ft. end up paying an equal amount as interest over a tenure of 15 years. This amount is spaced out over 15 years while all other transaction costs are paid one time at the time of purchase. This is why the end user often neglects to understand the significance of this.

Local charges swing significantly when Mutation & Transfer charges or Leasehold to Freehold conversion charges are a percentage of the cost of property with no upper limit. This significantly affects the cost that the consumer has to bear as in the case of Hyderabad and Ludhiana.

Generally the stamp duty rates have started coming down in Indian states. However, this drop is often set off by high Registration or Mutation charges. The consumer therefore does not benefit much from this notional drop. In Delhi, for instance, Stamp Duty has been lowered to 5% for men and 3% for women but a 3% Registration charge which is also a percentage of the property cost has given no relief to the end user. In a double whammy to the consumer in Lucknow there is a high Mutation charge, high EDC and high Leasehold to Freehold conversion charge. This does not allow the developers any flexibility in fixing his charges as there is no further absorption capacity n the buyer.

Boom towns like Delhi NCR, Pune, Jaipur and Kochi have higher developer charges including Maintenance, Parking and Society charges. Water charges are largely paid by developers to authority and users simply pay usage charges. Older townships such as Delhi, Bangalore and Kolkata have minimal upfront Water charges because these have been paid for before the property boom. However, new suburban areas reel under high electricity charges.

There is no rationale behind the local and developer charges levied to the consumer. With no regulatory authority monitoring the charges the consumer is often at their mercy.

In the Delhi NCR, though the region functions as a unified entity, the charges levied on consumers rest with four different state governments – Delhi, Haryana, U.P. and Rajasthan.

These local values are fixed at the state level and do not take into account city wise aberrations of value of land, economic drivers and consequent demands.

There is urgent need to allow local levies to be fixed at local levels rather than at state levels. Mumbai, Pune and Nagpur, for instance, would pay the same stamp duty charges irrespective of the fact that land values in Mumbai are highest in the country. Similarly in Haryana, Gurgaon Sonepat and Palwal would all pay the same stamp duty and registration fees.

Wherever new developer townships are coming up consumers are offered lifestyle products but pay the price in the form of hefty External Development Charges. EDC has been recently been hiked in Lucknow townships and the recent order in Jaipur too raises the EDC in the city’s private townships.



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Conclusion:

The transaction costs to the buyer can be classified into the interest rate to be paid on housing loans and the various dues and charges to be paid to the developer, development authority or various service providers.

However, despite the fact that the interest component is greater than the loan taken, it becomes easier for the buyer to bear because it is spread over 5,10,15 or 20 years. And it is something that the buyer factors in when he decides to purchase a house.

But the rest of the charges and costs add up to a whopping 16-39% of the cost of the property. In a city like Lucknow, it can account for almost 46% of the transaction cost.

Going by global standards brokerage fees are extremely competitive in India because they are determined by market forces. All that needs to be done is to regulated and educate this fraternity so that they adhere to ethical practices. But the amount of dues collected by the authorities in terms of stamp duty, registration and mutation charges as well as various other fees are way above global standards and need to tackled urgently. Stamp duty in India is way above global standards and is the highest even in Asia.

For details on Transaction Costs in each of the 16 cities, refer to the table below/attached sheet NHB City Wise Data.



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TRANSACTION COSTS IN HOUSING ACROSS 16 CITIES

Without Loan Interest Component

City Total Transaction Costs Additional Charges as a %age of

the cost of Property

Tier 1 6,984,162 16%

Delhi 7,322,074 22%

Mumbai 6,902,104 15%

Chennai 6,889,604 15%

Bangalore 7,101,684 18%

Hyderabad 6,917,104 15%

Kolkata 6,772,404 13%

Tier 2 4,981,804 25%

Ahmedabad 4,795,504 20%

Chandigarh 4,761,604 19%

Indore 5,092,904 27%

Ludhiana 4,936,104 23%

Bhubaneswar 5,134,104 28%

Pune 5,170,604 29%

Tier 3 4,164,267 39%

Lucknow 4,371,054 46%

Kochi 4,240,704 41%

Jaipur 4,062,354 35%

Coimbatore 3,982,954 33%



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RECOMMENDATION

Brokerage charges are rational in most India cities. They are largely ruled by market

forces. But regulation of the broker community to ensure that they undergo periodic education is a must by agencies such as the National Housing Bank. Since the outflow to a broker is a percentage of the cost of property it is a significant amount. Thus, it is important that some norms be laid on the functioning and the qualifications of brokers and the parameters for judging the competence of brokers.

Stamp duty charges in India are the highest in the world, way above even the rest of

Asia. This needs to be addressed. No longer is real estate a state bound transaction and the sector will benefit immensely if they can be rationalized across the country according to global norms of 1-2%. The government also needs to take into consideration city wise variations in economic and demand scenarios and fix local taxes to suit the same.

Other charges vary significantly from state to state and city to city. Mutation charges

can account for a significant percentage of costs to the end user in states like Andhra Pradesh. Leasehold to Freehold conversion charges also add a significant amount to the total cost in cities like Lucknow. These need to be capped.

A public awareness campaign should be undertaken by an agency such as the

National Housing Bank to sensitize users that purchasing a house is much more than factoring in the cost of the house. The add-on costs are high and need to be considered when purchasing the house or else the well intentioned consumer to will end up as a defaulter as he will run out of finances after paying for the actual purchase of the property. In many cases he may need to borrow from formal financial institutions to meet the additional costs



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List of Annexure:

1. Annexure 1 - Developer

2. Annexure 2 - Brokers

3. Annexure 3 - Banks & HFCs,

4. Annexure 4 - Development Authorities

5. Annexure 5 - End-users survey

6. Annexure 6 – Flow chart

7. Annexure 7 – Conversion chart for Delhi

Documents

Transaction Costs in Housingproperty.magicbricks.com/microsite/crisil/nhb-transaction-cost-analysis-report-final...The National Housing Bank (NHB), the apex level financial institution