SWAMIH Fund for stuck realty projects delivers 23,000 homes, unlocks liquidity worth Rs 35,879 crore

He said that these projects are spread across more than 30 cities including Amravati, Amritsar, Coimbatore, Dehradun, Jaipur, Jodhpur, Meerut, Mohali, Nagpur, Nasik, Thrissur, Vizag, besides Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Pune, Hyderabad, Bengaluru and Chennai, among others.

SWAMIH continues to take on new projects where RERA is applicable. “The only way we are different is we don't distinguish between Tier 1 and 2 cities. We do funding across cities,” he said.

“The Fund continues to evaluate more deals. The Fund has time till December 2024 to commit to new projects. And we have a deal flow, we are looking at that. There are about 179 projects that have preliminary approval. So some of those projects are under due diligence and over time some of those projects will get final approval as well. So deal flow is not really an issue,” he said.

So far, the Fund has given preliminary approval to about 1.1 lakh units and final approval to 83,000 units, he said.

The Fund so far has a deal flow of about 1.91 lakh units, of which about 1 lakh housing units will ultimately be taken up for completion considering that not all preliminary approvals will receive final approval.

“We are looking at them getting completed in the next five years or so. And in terms of a target, I think will be closer to perhaps 1 lakh units,” he said.

The Fund has shown that it is possible to invest in stuck projects and yet recover your capital after completing the projects.

“We've acted as a catalyst for other private equity funds in the industry that are already thinking about following the same approach, getting into the same asset class, that's one. Two, you know there have been many cases where after giving a SWAMIH term sheet, the existing lender of the project has decided that it looks possible. And they've decided to fund it on their own. So that's again how we come in as a catalyst,” said Kazi.

Project exits

The Fund has so far exited 12 real estate projects in three years.

“We've completely exited 12 projects and we've done partial exits in about 17 more projects. So 29 projects in all. An exit means that either the project is fully complete or it is generating enough and more, so that the money starts coming back to us. There is no shortage of money for construction,” he added.

The Fund has generated a 12 percent return from all the 12 projects it exited. “We've recovered our money and our investment returns. But it's still early days as it is still hardly 5 percent of the total portfolio,” he said.

A ‘start-up’ fund with a ‘nebulous’ vision - Speed and ownership at all levels

In November 2019, the central government launched the SWAMIH Investment Fund to help complete over 1,500 stalled housing projects, including those that have been declared non-performing assets (NPAs) or admitted for insolvency proceedings. The move was to help 4.58 lakh housing units across the country. Only RERA-registered projects with a positive net worth are provided funding.

Kazi said when the Fund was set up it initially functioned as a start-up and had a nebulous vision. “In a start-up, everyone has ownership, right? So that's what we did. We worked with empowered teams to scale up so fast. We could not have had a hierarchical structure. So we had teams that were empowered, two teams that were dealing with the developer or taking decisions related to the project. Only critical decisions travelled all the way to me. Everyone had responsibility and ownership for what they were doing,” he said.

“There was a flat structure in place and approvals were given overnight. That's the other bit of the start-up culture that we've incorporated. So speed as well as ownership at all levels.”

The whole idea around a stuck assets fund was also “nebulous”.

“While everyone was clear that something was needed to solve the problem, few had an idea about the scale of the problem till we did a market study. There was no precedent to fall back on. So, something different had to be done,” he said.

The Fund was unique because instead of disbursing funds the traditional way in two tranches, it decided to disburse only to the extent the expenses were actually incurred at the site. “It was something dramatically different that we did here,” he said.

Grounds on which funding for stuck projects can be rejected

Asked about the grounds on which projects that have applied for may be rejected, Kazi explained that it could either be on account of the first charge issue.

Most banks and NBFCs (the existing lenders) have been reluctant to give up on the first charge. Another reason could be that the project is not viable, the revenues are far lower and the project is unprofitable. “We necessarily require that the project should be profitable,” he said.

From a deal flow of 310 projects, the Fund has, therefore, given approvals to 131 or around 40 percent of the projects.

The viability of the project is essential. Usually, huge amounts of RERA penalties and refunds make a project unviable for any new developer to come in and complete it. There may also be instances wherein the developer may shy away from such funding as he may not be willing to give up control of project expenditure.

Lapsed environmental approvals are yet another reason.

“There have been instances wherein the environment approval may have lapsed and the developer may have decided against getting it renewed,” he said.

Projects undergoing insolvency proceedings

SWAMIH has provided term sheets to several projects that are before insolvency courts but the term sheet has to be accepted by the committee of creditors.

“That actually hasn't happened yet. It proceeds at its own pace. The COC has varying interests and so on. So, we don't have a single instance where the term sheet has been accepted. Also, in cases where projects have been handed over to an association of homebuyers, there are challenges as we cannot fund an association,” he said, adding the SWAMIH Fund can only fund a company.

“Given the legal structure as a SEBI-registered fund, we can only invest in non-convertible debentures,” he said.

Having said that, if an association decides to convert a welfare association into a company “then we will be more than willing to fund it with certain caveats such as a developer should get involved through a development management agreement and so on. But we cannot fund homebuyers as they are not authorised to give a personal guarantee.”

A formal corporate structure is a must, he added.

As for stuck projects where the promoter has gone missing, he said there too the Fund requires an investment banker to put together a package where a new developer comes in to complete the project. “All said and done, we are only funders or financiers. We are not developers.”

The challenges

With the cost of construction materials going up after the pandemic and the Ukraine war, the SWAMIH Fund too had its own share of challenges.

“In the three years of the pandemic and the Ukraine war, probably the only projects that were functioning or that were ordering for construction material were the ones financed by SWAMIH. So, we've taken the brunt of the price increase. We have seen a 25 to 30 percent increase in prices of raw materials and that has made the task more challenging for us,” he said.

Redevelopment projects in MMR

The SWAMIH Fund has also funded redevelopment projects in MMR. “Perhaps almost half of the projects in MMR would be redevelopment projects. The same rules that apply to a stuck project are applicable for both slum redevelopment as well as society redevelopment that we are trying to fund.”

“We are providing relief to them and are looking at rent payments as land payments,” he added.

He mentioned that redevelopment projects may find it difficult to get funding from banks or NBFCs. “In a redevelopment project, an expense has to be incurred first, revenue comes later. A building has to be built and owners have to be given rental accommodation. So that expense comes first. We have done quite a few such projects,” he said.