Principles of Real Estate Finance, embody aspects of both primary markets (direct investment in property) and secondary markets (investments derived from property).  Property level finance covering capital markets, mortgage backed securities and REITs are essential aspects.

The term primary market is used in Real Estate whilst referring to new projects in the residential and commercial space. Ereal esate financeven projects recently announced are considered part of the primary market.

It becomes secondary when the first buyer of a unit in a new project becomes the “primary” buyer of that unit. He buys at the primary rate the developer offers. The moment the primary buyer sells off this unit to another buyer, the property becomes part of the secondary market. For subsequent transfers of title and sale, the term secondary is used.

Advantages of a primary market

A lot of times, developers give promotional discounts to primary buyers, especially if the apartment complex is coming up in a distant suburb. However, the pricing would naturally depend upon the location and the surrounding infrastructure.

Nevertheless should you miss the initial discounts and if there be a good response to the project, one may end up having to buy at higher rates in the primary market itself. Often, developers do not sell all the apartments in the first phase. So, late entrants have an extra cost to bear.

Another aspect is of property (ies) lying locked in dispute which thus remains unoccupied for several years resulting in huge loss(es) to single or multiple owners. That risk gets mitigated in the primary market as Investing in the primary market usually ensures clear titles.

Furthermore, there is an expected transparency in the transaction. There could be a component over and above the advertised price in these deals which is a huge source of concern and relief on occasion for most especially those belonging to the salaried class. Hence the

Drawbacks of the primary market

Transactions in the primary market may come at a cost. In case your developer delays the project for whatever unforeseen reason you may have to wait for possession. This may mean expending rent for that much time apart from your equated monthly instalments.

Also if the project is coming up in a faraway suburb, you may have to wait for the surrounding areas to develop before you can actually move in your new house. Lack of infrastructure may inhibit other homebuyers from moving into the complex leaving vacancies.

The two markets viz. Primary and Secondary supply funds for Real Estate loans. In addition to using monetary policy and interest rates  to control the money supply, government can help moderate the severity of the impact of Real Estate cycles by establishing a strong secondary market which can limit the adverse effects of local economic considerations and circumstances on Real Estate lending.

Primary markets serve as the local mortgage finance market made up of the various lending Institutions in a community. Anybody wanting to borrow monies to finance the purchase of a home will seek a loan in the primary market perhaps from a bank like a savings loan.

The traditional source of funds for the Primary market is savings of Individuals and businesses in the concerned local area. Community savings, loan associations, money lenders.hundis, PO’s etc are typical forms of lenders in the Primary market. It gets its funds from the saving deposits of the Members of a community. These savings/funds are used to fund Real estate loans to members of that community.

The local economy has a significant effect on the amount of funds which the local lender has available. When employment is high, consumers are more likely to borrow money for cars, vacations and homes and the like.

Businesses borrow to expand and finance their growth. Banks and other lending institutions increase their lending activities to meet the existing and growing demand. Simultaneously however fewer people are saving today for various reasons. Primarily or perhaps due to a paradigm shift in the mind set of todays’ youth, easier availability of credit and many such factors. Decrease in deposits and corresponding increase in the demand for loans steadily deplete the funds available for lending. If local lenders cannot attract monies from other parts of the country to help meet the demand, their funds would be exhausted and the communitys’ economy severely disrupted. The Reverse also holds true.

When the economy is in a slump consumers are more inclined to save than borrow. Businesses suspend growth plans resulting in a drop in demand for money and lending Institutions deposits grow.

From a lenders point of view too little and too much money in deposits are both causes for concern. In the first case lenders primary source of income being the interest on loaned funds is depleted and in the second the lender loses money hence affecting his ability to reinvest the funds as he is paying interest to his depositors.

To get additional funds for Real Estate lending a local lender may sell mortgage loans he has already made. To do so however he will in all probability have to turn to the Secondary market.

The availability of funds in the Primary market depends a great deal on the existence of the secondary market which has a stabilizing effect on local mortgage markets.

Lenders are usually open to committing themselves to long term real estate loans even when local funds are scarce because they can raise more funds by liquidating their loans in the secondary market.

There is a dependency in the Residential Real Estate market between price categories being the offer and transaction price in both the primary and secondary market. If so what and how does the co-relation affect the dynamics in each category, how does it function in tandem and/or have a linear co-relation w.r.t. different cities—what are the many reasons and variables for their convergence or divergence. The influencing factors are myriad and would entail an entirely different analytical study based on financial, political demographic and geographical issues.

There is a feeling that Primary markets will be hit hardest as opposed to the 2-3 tier and tertiary markets. The low addition to supply of new inventory especially commercial should in all probability be a factor for sustained increase in returns there relative to primary markets.

Yield starved investors have driven up property prices to unsustainable levels in Primary markets and cities creating the most risk for steep declines in values especially if interest rates rise.

Given the slump in Real Estate in the recent past a slew of probable questions come to the fore vis-à-vis the Housing Industry.

  • Will prices rise ,Slowdown…plateau or drop?
  • Affordability… in all segments
  • Government at the Centre as well as State levels are spewing Affordable Housing but with the prevailing land prices how is that attainable?
  • Sustainable Inclination to buy… continued interest and inclination to invest in land and property
  • Mortgage interest rates … should they increase… and what will its impact be on the ultimate price leading to the same question of affordability
  • next and its members as the new group of home buyers are looking at different specs…
  • How does all of the above affect Rent and rental properties
  • Back to old joint family concepts/multi family system?
  • Will Developers focus on cheaper /affordable homes/housing? How does the cost of raw materials beginning with soaring cement prices, prohibitive sand prices, coupled with the scarcity of the same sum up to affordability?
  • Alternative solutions— innovations to reduce the cost of construction
  • Is it a fundamentals driven market…. Job growth, incomes, household formation more than by macro economic factors

Small budgets for buying offices in premium complexes has been somehow addressed as developers are applying the `smaller configuration’ strategy in the commercial segment, a move that has worked well for them in residential markets. Residential property markets having been sluggish in many cities and given those circumstances giving individuals the option of investing in commercial properties such as offices or retail units Some of which are available at competitive prices; on occasion even as low as half the residential property rates seems to be a viable and feasible option. Lower entry barrier, both in terms of configuration and ticket size, is allowing end users as well as investors to access grade A offices. So, not just small business owners, professionals…and various segments appear to be looking in that direction.

Where is Real Estate headed…..?

 The market seems to be at an all time low and there are many who concede that they have never faced such dismal market conditions in their many years in the Industry. Many however also believe or even hope that a correction is round the corner. Developers at least in Tamil Nadu and Kerala  are slashing rates and still find stocks piling, land owners are still hoping the market will correct and are holding on to unrealistic prices and looking more at outright sales than JV’s which in the current scenario do not interest or attract the developer. There seems no economic viability in it given the FSI available , the Development Regulations, and the rise in construction costs, [increase in raw material costs (cement become almost prohibitive), shortage of sand, transportation or import restrictions etc} and the selling price to be achieved for developers to break even is becoming increasingly difficult to achieve. They are hurting on the huge funds borrowed and their monthly EMI’s. Buyers have gained considerable bargaining power on completed homes as well as in booking the home itself. Where the booking amount and the first instalment would upon a time cover the cost of construction; buyers are willing to put down only 30% of the same today. Forget the huge profits that were upon a time a given in this industry with all the constraints survival and subsistence is becoming more and more difficult. That has unfortunately led to a compromise in quality, unspeakable violations with corners cut leading to a “Moulivakkam “situation. Credible Developers of course will resist but many smaller lesser known entrants who came in during the slump expecting or hoping to make a killing once the market looks up are jeopardizing the already fragile situation further.

Land Owners fear the time of conclusion and completion of a project hence prefer outright sales instead of joint development also because they are not sure if prices will dip and become more realistic so want to make notionally higher profits when the going seems good . Which is a high probability as Sales are at an all time low for the last year and a half. Some small & unfortunately unethical builders offer unbelievable ratios with advances and share in the building to take over properties which are dismal in quality and invariably built on violations and against approved plans.

The recent spate of changes and increase in the certifications and undertakings required by (Architects in particular) CMDA has seen a fair amount of resistance on various counts. Nevertheless the authority is left with little choice but to do that as it is logistically and physically impossible for them to monitor quality of structure and  the safety of construction i And/or micro manage the same which is in itself not their field of expertise or responsibility.

Further the Direct  and Indirect Tax changes and proposals in the latest Union Budget would undoubtedly have an impact. E.g. Service tax rate increase, receiver of services liable to pay, excise and other duties increased on rail transport…..have the cascading effect.

For now all eyes on the fate of Land Acquisition Bill and the GST Bill….


Sumana Vyas : Sumana has been a senior level executive with large consulting firms, focused on corporate strategy &development with a strong orientation in Finance, Law and Operations. She has consistently delivered mission critical results and has specialized in Growth Management and Business Development interacting with Government departments both at the central and state levels. In her last assignment, she was the CEO of CREDAI, Chennai & Credai Tamil Nadu