In a recent development, cash strapped Maharashtra government proposed to hike stamp duty on leave-license to 0.1% on market value or 1% of the average annual rent or deposit paid, whichever is higher, for residential properties. For commercial properties, the duty proposed is 0.4% for lease agreements over 60 months.

This is a whopping 160 times hike from the previous fixed amount of Rs 25,000 for residential and Rs 50,000 for commercial properties for 60 months.

Fortunes of real estate companies in India's financial capital could take a turn for the worse if the Maharashtra government accepts the proposal to hike stamp duty on leave-licenses.

The government's aim behind this move is to mobilize over Rs 1,000 crore and restore Mumbai to its previous glory. 

Most realtors had stomached the 2% service tax hike (from 10% to 12%) announced in Budget 2012-13 and instead opted to see the silver lining , which is the introduction of external commercial borrowings (ECBs) in the low-cost housing segment and the reduction of withholding tax on ECB interest from 20% to 5%.

However, if the hike comes into effect, it will increase prices of leave-and-licence properties, both residential and commercial, by a huge margin which in turn will deal a sharp blow to an already-sluggish Mumbai real estate demand. India Bulls , Oberoi , HDIL , Phoenix Mills , Bombay Dyeing and Raymonds are among the realty companies that will bear the brunt of the proposed stamp-duty hike.

Buckling demand

In the current high interest rate and slow growth environment, an increase in prices will only dampen demand for the mature realty market in Mumbai. The quarter ended December 2011 saw a record drop in home sales compared to the previous three years. Incidentally, Mumbai is among the costliest market in the country .

A report by PINC Research states that "The Feb'12 housing registration data for Mumbai and Mumbai suburbs was down 7% from Jan'12 and 13% YoY. The housing registration, as expected, has remained subdued over past 1-year owing to lower absorption because of high interest rates, lower affordability and slower pace of new launches."

The report goes on to say that the outlook could improve towards the end of this fiscal and early next year, by when the RBI would have cut interest rates. However, if this hike is passed, the impact of falling interest rates will be lost on customers.

Shaky Fundamentals

Real estate companies have been characterized by tumbling profits the whole of FY12. The sector has been plagued by high cost of debt, ever-increasing land prices and declining sales which have severely dented the books of companies.

For the quarter ended December 2011, HDIL profits crashed 90% to Rs 24 crore from Rs 250 crore in the corresponding quarter the previous year. Oberoi Realty and Purvankara too saw a 50% and 26% fall in profits respectively.

However, it is not only the bottomline of these companies that is hit. Sales are at record lows for most companies due to the hostile environment.

Analysts' Realty Check

From an investment point of view, experts are not too bearish on realty companies because most of these names have already been punished brutally.

"In this environment, given the fact that one can hope interest rate cuts over the next 12 months, you can look to buy some names after a 10-20% correction," said Sandeep Shah of Sampriti Capital.

However, he prefers the bottom up approach when looking to enter. "There are stocks which have low debt and some with zero debt, and you should probably nibble at that space in this environment," he advices. Only when momentum comes back and when the environment improves does he advice looking at the more riskier bets.

SP Tulsian of sptulsian.com says it could be very negative for Mumbai realty if this hike comes through. However, since companies have resorted to leasing out properties or putting them on rent due to the lack of appetite, he says even the lessee may be impacted by this increase. "Maybe growth in the financial sector, media and entertainment and other will feel the brunt of this increase," he said.

According to him, from the realty space, this hike will hit Oberoi Realty, IndiaBulls Real Estate and Marathon Nextgen Realty the most.