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All you need to know about last mile funding of Rs 10,000cr for the real estate sector

Experts feel the fund seeks to address key issues of project funding, completion and delivery but adequacy of the fund, as well as the establishment of funding sources are issues that may pose challenges in its implementation

Representative Image
Representative Image

Finance Minister Nirmala Sitharaman on September 14 announced a special window worth Rs 10,000 crore for last-mile funding to networth positive projects.

Other measures announced include relaxation of External Commercial Borrowings (ECB) guidelines for financing of homebuyers under Pradhan Mantri Awas Yojana (PMAY) and reduction of interest charged on housing building advance via linkage to 10-year G-Sec yields.

The size of the stressed asset fund would be Rs 10,000 crore and would be contributed by the Centre. A similar sum would be contributed by outside investors: private capital from banks, sovereign funds and development finance institutions.

Close

The creation of a Rs. 20,000-crore fund is for last-mile funding of affordable and mid-segment housing projects only. Most of these projects should have achieved around 60 percent completion, but lack cash flows for the balance amount.

The fund, which is proposed, to be created as a category-II Alternate Investment Fund (AIF), would support projects that are networth positive and have not been classified as an non-performing asset (NPA) or referred to the National Company Law Tribunal (NCLT).

This last mile funding is expected to provide relief to homebuyers stuck in nearly 3.5 lakh incomplete projects across India.

The fund would be professionally run by experts from housing and the banking sector. These specialists will need to identify affordable and middle-income projects that are in need of last-mile funding for completion.

What homebuyers should know

Rs 10,000 crore would at least ensure that healthy projects are not pushed into a bad debt like situation for want of working capital.

Projects that are stuck on account of last mile funding are likely to benefit, especially those that are facing liquidity issues after the NBFC crisis.

“Until last year, NBFCs contributed 60-65 percent funding to real estate developers. After the IL&FS crisis, this funding source reduced drastically. This last mile funding, as announced by the Finance Minister, would bridge the gap. However, this is not enough,” says Samantak Das, Chief Economist and Head of Research & REIS, JLL India.

Is the amount enough?

“While the initiative provides a structured method of infusing liquidity into stuck projects, and thereby seeks to address the key issues of project funding, completion and delivery, the adequacy of the fund, as well as the establishment of funding sources, are issues which are expected to pose certain challenges in implementation,” Mahi Agarwal, Assistant Vice President and Associate Head at ICRA, said.

As per government estimates, around 3.5 lakh dwelling units would be eligible for funding support under this scheme. Most constructed units have largely been in the 80-110 square metre range. Considering this as the typical unit size range and assuming an average construction cost of around Rs 1,700 per square foot and 60 percent completion, the amount required for funding the balance project construction cost may work out to around Rs 20,500-28,200 crore.

Depending on the actual size of the individual dwelling units, the fund size of around Rs. 20,000 crore may be sufficient to cover the construction cost for only some eligible houses.

“While the government is committed to providing Rs 10,000 crore, the balance is proposed to be funded by other investors. However, given the prevailing macro-economic weakness, both domestically and internationally, investor ability and appetite to contribute to the fund remains to be seen,” she said.

As per Prop Equity’s estimates, however, a fund of at least Rs 90,000 crore is required for completion of stressed projects. There are approximately 13.8 lakh units in the mid to affordable category that are approximately 60 percent complete and due for completion in the next two years.

The online data, risk management and analytics platform estimates that 7.4 lakh units are stressed and in need of aid. Of these, 4.4 lakh units of the 13.8 lakh units are already on hold due to lack of funds and have been delayed for more than five years. Most developers have been taken to NCLT or are NPAs with banks. Hence, these units do not qualify for this aid.

Additionally, 3 lakh more units will be in the stressed category of the balance 9.4 lakh units that are under construction and more than 60 percent complete and scheduled to be completed over the next two years.

Of these, approximately  7.4 lakh units, over 80 percent are in Tier 1 cities where the total cost of construction to construct a unit is around Rs 2,500 per sq ft. PropEquity estimates that last mile funding  of approximately 800 psf out of the Rs 2,500 per sq ft will be required to complete the unfinished projects. The weighted average size per unit is 1500 sq ft. Thus, approximately Rs 12 lakh per unit will be required to complete each unit.

Thus, a Rs 90,000 crore fund would be required to complete a total of 7.4 lakh stressed units, says PropEquity.

Unlikely to assist projects under litigation

It is unlikely to help resolve problems being faced by homebuyers stuck in projects like Jaypee or Amrapali. The government has concentrated on projects that are not subjudice. Projects, which are before courts, such as Jaypee, Unitech or Amrapali will be kept out of its ambit.

Avnish Sharma, partner at Khaitan & Co is of the view that given that there is a specific exclusion for non-NPA and non-NCLT projects, it would appear that intent is only to exclude non-NPA and non-NCLT real estate projects and not matters that are otherwise in RERA or for that matter in NCDRC. However, one will have to see the fine print on the detailing of this provision.

The announcement is a “half-hearted attempt by the government to revive the real estate sector that is now showing long-term recessionary trend. Even the government’s fund of 10,000 crore for affordable middle income housing projects (non-NPA and non-NCLT) will have a limited impact since majority of the stalled projects are due to lack of liquidity and thus will be NPAs,” said Satish Magar, President, CREDAI.

Fund only for affordable and mid-segment housing projects: To this effect homebuyers within the luxury segment may have to wait even further.

No clarity yet on the price or definition of mid-segment homes that will be included in this. But one thing is clear – the government is looking to address concerns of ‘middle-income’ homes and is looking beyond affordable homes or units below Rs 45 lakh.

Issues that remain unanswered include the process by which the committee comprising housing and banking experts will select the projects. The sector is awaiting clarity on the fine print of rules to avail of the credit scheme. Clarity on return on investment for the private sector is also awaited.

Steps to be taken going forward

Overall, experts see it is a welcome measure from the supply side. For consumption to rise, buyers have to have the confidence to invest in the property market. Experts feel these steps would result in some improvement in sales this festive season.

vandana.ramnani@nw18.com

 

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First Published on Sep 16, 2019 04:39 pm
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