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The issue of transparency in secondary or resale real estate transactions, has indeed been on everyone’s minds, ever since the Real Estate (Regulation and Development) Act (RERA) stepped in, to rescue the primary or first sale-by-developer market. The question that looms large is – have the government’s moves to clean up the sector, benefited the resale (or secondary sales) market, as well? Overall, the central government has put in tremendous efforts, towards creating a healthier and regulated real estate market environment. Implementation of policies like demonetisation, RERA, the Goods and Services Tax (GST), Real Estate Investment Trusts (REITs), the Benami Transactions (Prohibition) Amendment Act, 2016 and the Pradhan Mantri Awas Yojana (PMAY), among others, have brought fresh hope.
At the same time, the Indian real estate market has also witnessed other interesting new trends – a prominent one being the increased demand for ready-to-move-in properties. Various factors were responsible for this rise. The chronic delays in project execution of the past, have significantly boosted buyer and investor interest for ready-to-move-in properties, not least of all, because ready homes decrease the combined pressure of monthly EMIs and rental outgo for the common man. Also, ready-to-move properties do not attract GST.
Eventually, the demand for properties in the secondary sales market, including ready and almost ready units, also increased. However, has this segment also benefited from the increased transparency and efficiency in the market? The answer is, yes, it has, although the reasons may not be immediately apparent.
Effect of demonetisation on the resale market
Soon after the demonetisation move in November 2016, it was widely anticipated that the ‘surgical strike’ against black money, would massively damage the Indian real estate sector, particularly the secondary market, which was dominated by cash transactions. Initially, demonetisation did result in reduced sales in the secondary segment, with most investors seeking to exit. Tempered demand compelled them to reduce the prices of their second-sale properties, by as much as 10-20 per cent, particularly in the NCR, which was largely investor-driven. Obviously, this gave an advantage to end-users, as speculative pricing had kept them away from the property market. Unlike earlier, investors have now become more realistic, in their expectations of returns on their investments.
Interestingly, if we look at the more developed nations, a price appreciation to the tune of eight to 10 per cent y-o-y, is considered a realistic expectation for a property investment. In India, it was as high as 200 per cent, in certain markets. This expectation simply had to deflate and it certainly has deflated. Almost 20 months after the standstill triggered by demonetisation, its negative effects on the resale market have tapered considerably. The data coming in has debunked the general misconception that demonetisation has terminally ruined the real estate sector. Even more importantly, sales in the secondary real estate market have picked up, post-demonetisation.
Demonetisation has resulted in increased transparency, even in the secondary real estate transactions, even if RERA did not help it as much as it did the primary sales segment. Cash transactions, which formed almost 30-50 per cent of the total payments earlier, have been seriously curtailed and investors no longer see any point in hoarding properties, to use up their black money. The gradual reduction of the price gap, between the primary and the secondary markets, was another visible positive impact.
Importantly, demonetisation has created fear among buyers, who might have thought of cash deals previously. While doing transactions in the secondary market post-demonetisation, most buyers are ready to pay more capital gains tax. This is in stark contrast to earlier times, when they would try to shrink their exposure to this tax. Moreover, this surge in capital gains tax revenue, has added handsomely to the government coffers. Contrary to all doom-and-gloom predictions, demonetisation has had a very positive effect on the secondary sales market. Moreover, even RERA has had helped this segment, albeit more indirectly.
Impact of RERA and GST on resale properties
After RERA was unleashed, developers in the markets under its purview rushed to register their projects, or obtain completion certificates for projects that were nearing completion. Resale market buyers benefitted, as there was a surge in ready-to-move-in properties, both, for sale and rent, in this segment. In the NCR, this was especially evident in markets such as New Gurugram, Noida Expressway and Dwarka Expressway, where investors were holding on to a massive share of the existing housing inventory, in anticipation of a profit windfall.
Also, the GST, implemented in July 2017, only applies to under-construction properties. Ready-to-move-in homes and land are exempt from it. This considerably reduced the demand for under-construction properties by buyers and increased demand for ready-to-move properties in both, the primary and the secondary sales markets. There has been an almost 10-12 per cent increase in the number of buyers in the secondary real estate market, since demonetisation – more so, with increased demand for ready-to-move-in properties. Genuine end-users now prefer to buy what they see.
The confusion under the new regulatory environment in Indian real estate, kept a large number of buyers away from investing in the property market. In order to swiftly exit from the property market, most investors reduced the prices of their properties over the last few years. This, in fact, resulted in lower property values in the secondary market, by as much as five to 10 per cent from the primary market, in many projects. In the past, a comparison of unit prices within a particular project, showed that the developer’s price for ready-to-move-in options was lower than those quoted by investors looking to re-sell their units. Re-sellers looking to offload their holdings, had no option but to relent to the pricing pressures.
In the current scenario, buyers are at a major advantage in the secondary market – firstly, because they can see the product and its quality first-hand and secondly, because they get better pricing options. For developers, on the other hand, finding buyers for their ready-to-move-in properties in the primary market has become a major challenge, as their prices are slightly higher than those quoted by investors looking to sell their properties within the same project.
Most buyers are tempted to buy in the resale market, as re-sellers, in a hurry to exit, are willing to reduce their prices.
Future impact of policy reforms
The secondary real estate market will gain more momentum, as and when the RERA is fully implemented, across all states. However, even now, RERA and other pertinent policy reforms, have opened several new avenues for growth in the Indian real estate sector, by boosting the confidence of institutional private equity investors. In fact, Indian real estate’s attractiveness to institutional investors is growing multi-fold. Private equity inflows into Indian real estate rose by almost 15 per cent over last year’s USD 2.5 billion, in the first quarter of 2018 itself.
As capital allocations to real estate grow, investors will demand further improvements in transparency and technology must enable far more granular assessment of the country’s real estate market patterns. Encouragingly, there is visible progress on this front. Under the government’s Digital India programme, databases which track buildings at every stage of construction and after completion, will grow. Likewise, digital records of real estate occupiers, investment flows, property values and yields, will expand rapidly. Every industry stakeholder will have access to increasingly granular and pertinent information.
In other words, the country’s real estate market is maturing and it is not just primary sales, which are becoming more transparent as a result. The secondary sales market is a direct and indirect beneficiary of all these measures to make India’s property industry a more wholesome, transparent and unilaterally beneficial one.
(The writer is vice-chairman, ANAROCK Property Consultants)