The year 2017 was great for IPOs (Initial Public Offerings) as the market witnessed about $11 billion worth of fresh issues in primary market. One of the reasons sighted for this stellar performance was the presence of an active secondary market for these securities. In general, the strength of a primary market is determined by the robustness of the secondary market.
Similarly, real estate markets are also segmented into primary and secondary markets. Therefore, in order for the primary real estate or the ‘new launches’ to perform well, the effectiveness and transparency of the secondary market needs to be in place. This is what is lacking in Indian real estate. Given the current oversupply in the real estate market, there is a dire need for addressing major issues of the secondary real estate market.
The sell-side market participants of the secondary real estate are usually investors, looking to ‘cash-in’ or liquidate their investments. Apart from these investors, there are the secondary home buyers, looking to upgrade their lifestyle or those in need of money. The buy-side market participants of the secondary market are a mix of investors, first-time home buyers and other home buyers. Apart from these, other participants are brokers and fund houses such as NBFCs, HFCs, Public & Private Banks, Private Equity, etc. who play a major role in facilitating the transaction in terms of pricing and time taken to close the deal.
As an asset moves from a primary market to secondary market, certain risks such as construction risk and regulatory risk are reduced. However, certain risks like market risk, liquidity risk, title risk etc which are familiar to the primary market still exists in the secondary real estate market. Hence, prices of secondary properties are little higher making the returns from investment in secondary properties less than under construction. However, it is still preferable for investors with a moderate risk appetite looking for a constant stream of inflation adjusted income. Moreover, the current level of 12% GST and the negative sentiments of home-buyer’s towards the under-construction properties are some macro effects leading to the resurgence of the secondary real estate market.
Traditionally, real estate has always been considered as an illiquid asset along with the concerns of price inefficiency and information asymmetry adding on to the uncertainty factor of this asset class. Due to this, the secondary real estate market which should ideally be determined by the market forces(demand and supply) is not exemplified at certain times. Moreover, no GST is applied to the constructed secondary market transaction. But for the sellers, capital gain tax is applied dependent on the holding period of the asset, which can be as high as 30%.
RERA has brought the much needed transparency in the sector but is only limited to under-construction. Also, technology can play a vital role in bringing transparency and efficiency in the secondary market. Blockchain and smart contracts can be viewed as a great opportunity to overcome traditional problems of real estate as an alternate asset class. With the blockchain technology, all information regarding the asset such as land title, historical transaction value, area statement, etc can be safely stored in a digital form inside a cryptographic block and can be made available to everyone. Smart Contracts can make property tradable like securities and overcome the illiquidity and price inefficiency quotient to a certain factor.
Thus, while there have been multiple measures to regulate the primary sector, the government has to start taking the secondary markets seriously too. Bringing in more liquidity and transparency to the secondary markets is the need of the hour.