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Will the FM’s real estate push create a virtuous cycle?

In spite of the good intent, the amount committed may just be a drop in the ocean. ​


Highlights
- Rs 25,000 crore last mile funding to viable real estate projects
- Relief for homebuyers who have already committed most of the purchase consideration
- Difficult to ascertain project net worth
- Multiplier effect only if a large number of projects see the light of day
- Projects with large unsold inventory may not still have access to funding
- Likely to squeeze margin of developers

- Amount committed minuscule compared to the size of the unsold inventory

FM’s announcement on unclogging the real estate sector is a welcome move with all the right intentions. However, implementation remains the key and given the size of the initial commitment, it may well be a drop in the ocean.

The proposal

Close

The Finance Minister has announced a funding window in the form of Category - II AIF with corpus of Rs 25000 crore (government to contribute Rs 10,000 crore while LIC, SBI and sovereign funds to contribute the rest). SBICAP Ventures will be engaged as investment manager for the fund.

This fund will provide relief to developers that require funding to complete their unfinished projects, and consequently, ensure delivery of homes to buyers. The government has approved the establishment of a 'special window' to provide priority debt financing for the completion of stalled housing projects.

The fund has extended the scope of credit even to projects that have been considered NPA or are in the NCLT process—a key departure from the original announcement that specifically excluded such projects.

The government has provided further clarity on affordable and mid-income housing by inclusion of units with price under Rs 2 crore in Mumbai and under Rs 1.5 crore in all other cities across India, apart from the already included affordable housing category (unit price below Rs 45 lakh) to avail of credit.

Also, the scheme would exclusively target those which are RERA registered and net worth positive projects i.e. cash flows from the project are expected to be positive, post availability of credit for construction. The government has not put any conditions on stage of construction for any of the projects. However, projects requiring the least amount of funds for completion would be given priority.

Will it make the desired difference?

While the government’s intent is positive, the real test will be the structuring and implementation. For instance, builders typically operate across projects and hence, money raised for one project finds its way to some other project, which makes the task of ascertaining project cash flow difficult. Second, the last-mile funding will benefit homebuyers where most of the project cost has been paid for by the buyers and the project is completely sold and the completion is delayed due to the funding constraints of the builder.

This would typically apply to projects which are less than one year away from completion. If banks, HFCs and the like have exposure to such projects, it would help alleviate their stress. The incremental demand for cement, paints, electrical, lights, fans, tiles, sanitaryware can result in incremental benefit for these downstream sectors linked to real estate and could have a multiplier effect on the broader economy. However, the quantum of the benefit will depend on timeliness of implementation and extent of coverage and hence, is unlikely to accrue in the short term.

For projects that have large unsold inventory, the last-mile financing leading to completion may not solve the problem of unsold inventory due to lack of demand/purchasing power.

Real estate developers may not gain

For real estate developers, it may not be music to their ears for multiple reasons. The funding may come with multiple conditions pertaining to liquidation of inventory and completion within a timeline that can actually squeeze their margin. In any case, completion of a number of projects might lead to inflation in input prices. Moreover, large supplies coming into the market might impact price realisation as well.

Having said that, a lot hinges on the approach and capability of the professional investment manager and how quickly they can unclog the projects that are nearing completion and re-deploy the money in the next stage of longer gestation projects.

Size of the problem is too large

In the absence of any official measure, it is difficult to ascertain how Rs 25,000 crore can move the needle for the stuck real estate sector. According to data from real estate research and consultancy firm Liases Foras, over 13 lakh houses worth Rs 9.38 lakh crore are lying unsold across India. The value of the unsold inventory is the highest in the Rs 1-2 crore bracket, where 1.28 lakh units valued at Rs 1.8 lakh crore are awaiting buyers. In spite of the good intent, the amount committed may just be a drop in the ocean. ​

For more research articles, visit our Moneycontrol Research page

Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here

 

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First Published on Nov 7, 2019 03:25 pm
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