Howpolicy interventions helped the resale property market
The number of buyers in the secondary real estate market has increased by 1012% since demonetization
Theissue of transparency in secondaryorresalerealestatetransactions hasindeedbeenoneveryone’s minds ever since RERA stepped in to rescue the primary orfirst sale-by-developermarket. Thequestionthatloomslargeis– have the government’s moves to clean up the sector benefited the resale (or secondary sales) market as well?
Implementation of policies like demonetization, RERA, GST, REITs, the BenamiTransactions (Prohibition) Amendment Act, 2016 and the Pradhan Mantri Awaas Yojana (PMAY), among others, havebroughtfreshhope.
At the same time, the Indian real estate market has also witnessed other interesting new trends - a prominent one being the increased demand for readyto-move-in properties. Various factors were responsible for this rise. Thechronicdelaysinproject execution of the past havesignificantly boosted buyer and investor interest for ready-to-move-in properties, notleastofallbecause ready homes decrease the combined pressure of monthly EMIs andrental outgo for the common man. Also, ready-to-move properties do not attract GST.
Eventually, the demand for properties in the secondarysales market, including ready and almost ready units – also increased. However, hasthis segment also benefited from the increased transparency andefficiencyinthemarket? Theanswer is – yes, it has, thoughthereasons may not be immediately apparent.
Soonafter the demonetization move in November 2016, it was widelyanticipatedthatthe‘surgical strike’ against black money would massively damage the Indianrealestate sector, particularly the secondary market which was dominated by cash transactions.
Initially, demonetization did result in reduced sales in the secondarysales segment, with most investors seeking to exit. Tempereddemandcompelledthemto reducetheprices of their secondsale properties by as much as 10-20% - particularly in NCR, which was largely investordriven. Obviously, this gave an advantagetoend-users, asspeculative 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.
CUT TO JULY 2018
Almost 20 months after the almost complete standstill triggeredbydemonetization, its negative effects ontheresalemarket have tapered considerably. The data cominginhasdebunkedthe general misconception that demonetization has terminally ruined the real estate sector. Even more importantly, sales in the secondaryreal estate market havepickeduppostdemonetization.
Demonetization has resulted in increased transparency even inthesecondaryrealestatetransactions, evenifRERAdidnothelp it as much as it did the primary sales segment. Cash transactions, which formed almost 30-50% of the total paymentsearlier, have been seriously curtailed andinvestorsnolongersee anypoint in hoarding properties to use up their black money. The gradualreductionofthepricegap betweentheprimaryandthesecondarymarketswasanothervisible positive impact. Very impor- tantly, demonetization has created actual fear among buyers who might have thought of cash deals previously. While doing transactions in the secondary market post demonetization, most buyers are ready to pay more capital gains tax – in stark contrast to earlier times when they would try to shrink their exposure to this tax. (Of course, this surgeincapitalgainstaxrevenue has added handsomely to the government coffers).
Contrary to all doom-andgloom predictions, demonetization hashadaverypositiveeffect on the secondary sales market. Moreover, even RERA has had helped this segment, albeit more indirectly.
After RERA was unleashed, developers in the marketsunder its purview rushed to register their projects or obtain completion certificates for projects that werenearingcompletion. Resale market buyers benefitted as there was a surge in ready-tomove-in properties both for sale andrentinthis segment. In NCR, this was especially evident in marketssuchasNewGurugram, 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 Goods and Services Tax (GST) implemented in July 2017 only applies to under-construction properties. Ready-tomove-in homes and land are exemptfromit. Thisconsiderably reduced the demand for underconstruction properties by buyers, and increased demand for ready-to-move properties - in boththeprimaryandthesecondary sales markets.
There has been almost 10-12% increase in the numberofbuyers in the secondaryreal estate since demonetization - more so with increased demand for ready-tomove-inproperties. Genuineendusersnowprefertobuywhatthey see.
The confusion under the new regulatory environment in the Indian real estate kept a large number of buyers away from investing in thepropertymarket. In order to swiftly exit from the property market, mostinvestors reduced the prices of their properties over the last few years. This, in fact, resulted in lower property values in the secondary marketbyasmuchas5-10% from the primarymarketinmanyprojects. In the current scenario, buyers are at a major advantage in the secondary market – firstly because they cansee the product and its quality first-hand, and secondly because they get better pricingoption. Fordevelopers, on theotherhand, findingbuyersfor 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.
THE BIGGER PICTURE
Thesecondaryrealestatemarket will gainmoremomentumasand whentheRERAattainscomplete implementationcoverageacross all states. However, even now RERAandotherpertinentpolicy reformshaveopenedseveralnew avenuesfor growthintheIndian real estate sector, not least of all by boosting the confidence of institutional private equity investors. In fact, Indian real estate’s attractiveness to institutional investors is growingmultifold - private equity inflows into Indian real estate just rose by almost 15% over last year’s $2.5 billion in the first quarter of 2018 itself. As capital allocations to real estate grow, investors will demandfurtherimprovementsin 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 whichtrackbuildings at everystageofconstructionand after completion will grow. Likewise, digital records of real estate occupiers, investment flows, property values and yields will expand rapidly.
In other words, the country’s real estate market is maturing – and it’s not just primary sales whicharebecomingmoretransparentasaresult. Thesecondary 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.
Demonetization did result in reduced sales in the secondary sales segment