The Modi government's GST masterstroke is expected to have a significant impact across various industries, including real estate, which could see a 3-4% immediate correction in construction costs and a 7-8% drop in home prices if developers pass on the GST benefits to end-consumers, say experts. The new indirect tax reforms are expected to provide relief in the form of price reductions to the middle class, MSMEs, and farmers, particularly.

The realty industry, which accounts for about 7% of India's GDP, has seen a massive decline in housing sales in the affordable segment in recent times due to high interest rates, rising property prices, and reduced demand from lower-income buyers.

The GST bonanza, coupled with a natural swell in demand during the upcoming festive season, could provide a much-needed fillip to the sector. Industry feels there could be a revival in housing sales across the affordable segment with GST 2.0, as homebuyers, especially price-sensitive middle class, will directly benefit from the expected price cuts in housing prices because of lower construction costs.

As the construction raw materials, including cement, account for more than half of the overall cost for builders, the price reductions will make homes affordable for ‘mid-range and premium projects’, they feel.

Input costs likely to drop by 3.5-4.5%

With the implementation of GST 2.0, construction costs are expected to come down by 3.5-4.5%, according to a Crisil Intelligence report. A reduction in GST rates on cement is set to lower raw material expenses for developers, improving margins and cutting project costs. “GST on cement has been cut from 28% to 18%. This will bring substantial savings on construction costs. The cut is expected to improve developer margins and lower project costs,” says the CRISIL report.

Cement, being one of the most critical cost elements, accounts for 25–30% of raw material expenses. Other raw materials that have seen a GST rate cut under the new GST reforms include marble and travertine blocks, granite blocks, sand lime bricks, and stone inlay work. These items will see a 5% GST, down from 12% in the past, from September 22.

“The 10-percentage-point reduction in GST on cement is estimated to result in a 3.0-3.5% savings on overall construction costs, and the rate revision on marble, granite and related inputs an additional 0.5–1.0%,” the CRISIL report stated.

Developer margins set to improve, homebuyers could save 5-8%

As input costs decline, developer margins are set to improve. This is crucial because GST rates applicable to the property segment have not been revised, meaning buyer sentiment remains unaffected, avoiding confusion or deferment of purchase decisions.

According to the Confederation of Real Estate Developers’ Associations of India (CREDAI), the apex body that represents over 13,000 private real estate developers across India,  homebuyers are expected to save about 5% with the simplification of the GST rate structure.

"The reduction in GST on cement from 28% to 18% is a landmark move that will have a transformative impact on the real estate and construction sectors. This reduction is expected to bring about nearly 5% savings in overall construction costs, which will ultimately be passed on to homebuyers, thereby boosting housing affordability and helping more families achieve their dream of home ownership," says Shekhar Patel, President, CREDAI.

"With reduced input costs, the overall cost of construction will come down, and we are committed to ensuring that these benefits are passed on to our customers. This means that owning a home becomes more affordable without compromising on quality or design. The timing is ideal, as the festive season is traditionally when families make significant purchase decisions," says Mohit Goel, Managing Director, Omaxe.

The experts also see it as good news for real estate. "Each of these (cement and other construction items) is a vital input material. At this point, how much of this will get translated into price correction is not certain. But in my view, about 8% should be very clearly visible, and the real estate output price correction and that itself could be a massive price correction. If it is available to the consumer, even 1-2% is something which brings massive relief, but imagine something which is beyond 5% is definitely going to be very noticeable," Arvind Nandan, MD – Research & Consulting, Savills India, told Fortune India.

But the question is, will developers pass on these GST savings to consumers or keep the margins for themselves?

Some developers agree that after the GST relief by the government, the onus is now on us to turn tax relief into timely delivery. "Cutting GST on construction essentials is the strongest signal to real estate in years. Bringing cement down from 28% to 18% trims input costs and stabilises site cash flows. I expect a 3–5% reduction in construction costs, which can translate into up to 5% relief in unit prices in competitive micro-markets. For homebuyers, this enhances affordability and can pull fence-sitters into the market during the festive window," says Sujay Kalele, Founder and MD, Tru Realty. Kalele, who was former CEO at Kolte Patil, added that for developers, lower input taxes ease working capital, support affordable and mid-income launches, while for the real estate market, one can expect stronger absorption, cleaner price discovery, and healthier balance sheets. 

Nandan says the industry would want to take the benefit of the opportunity, which is expected to swell with the festive season coming around. "They're sitting on inventory, which they'll have to take care of, as there is a holding cost. If you don't sell, you sit on it, maintain it, pay the property taxes, and do all the maintenance. Though there are subjectivities — the wiser ones will pass it on 20% or 10%, but in my view, 7-8% is a very reasonable amount. On top of that, the festive season sees a natural swell in demand. So, you really have to be disconnected from the marketplace to not pass it on."

The reduction in GST rates will create a meaningful impact for both developers and homebuyers across the mid and luxury real estate segments, says Rajat Khandelwal, Group CEO Tribeca Developers. "For mid-segment buyers, it directly lowers the upfront cost burden, making quality homes more accessible and stimulating demand. Developers, in turn, can leverage improved cash flows to optimise pricing strategies and accelerate project deliveries," adds Khandelwal.

Will companies launch more affordable projects?

As the supply side gets a boost, improved margins may encourage developers to launch more affordable projects. “This will improve project viability, support developer margins, and—if partially passed on—enhance affordability of homebuyers. Supply side gets a boost: Improved margin outlook may encourage developers to launch new projects, especially in affordable and mid-income segments,” the CRISIL report said.

However, Savills India's Nandan feels that in the short run, the number of projects may not expand very quickly, but in the long term, it should. "I don't know if it will happen immediately because there is so much unsold inventory anyway. The first reflex will be to clear it and see how the sales velocities go. If they look positive, then it should happen. But real estate is a long-term product creation cycle. You will have to allow for the existing stock to clear to a reasonable extent, and then the speed should pick up. So, six months or nine months later."

Overall, the decision reflects a progressive approach, but some feel the impact on the ongoing projects is limited. "For upcoming projects, this reform could lead to cost savings of up to 5%, depending on their stage of execution and material requirements. The impact on ongoing projects, however, is likely to be relatively modest,” Binitha Dalal, Founder and MD at Mumbai-based real estate fund and management company Mt. K Kapital.

Dalal adds that the government should take additional steps to give a strong boost to affordable housing and reconsider the double indexation of GST on redevelopment and JDAs. "Such measures will make housing more accessible and enhance competitiveness. Overall, this decision reflects a progressive approach, and we look forward to more reforms that support growth."