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Will non-extension of moratorium on new insolvency proceedings unleash an avalanche of distressed real estate projects?

A liquidity-starved realty sector needs more stress funds like SWAMIH. Institutions need to be encouraged to establish such reserves and extend credit facilities to a developer for last mile funding to complete stalled projects, even though the record of NCLT projects handed over to third party developers, is as yet, unproven


With less than 24 hours left for the moratorium on new insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) set to expire, real estate experts believe that established developers may get an opportunity to pick up distressed realty projects following a spurt in National Company Law Tribunal (NCLT) filings, in case the deadline is not extended.

Going forward, the sector may witness more joint developments, joint ventures and development management agreements for completion of stressed unfinished projects.

This trend will eventually benefit consumers, as financially weak developers are weeded out and incomplete projects will finally see the light of day, they say.

“The Government of India, across 2020, brought in multiple measures to mitigate the effects of COVID-19 on businesses. Sections 7, 9, 10 of the Insolvency and Bankruptcy Code were suspended; and in turn, these were extended till March 24, 2021. While the extension remains the prerogative of authorities, the move shall be welcomed if granted further extension. But if non-extended, as a matter of fact the sector will witness foreclosures and liquidation of stalled projects leading to consolidation in the market,” Niranjan Hiranandani, national president, NAREDCO, told Moneycontrol.

Simultaneously, he said, regulators need to chalk out an alternative solution to address such grim issues. Industry body NAREDCO, recommends that more stress funds like the Special Window for Completion of Construction of Affordable and Mid-Income Housing Projects’ (SWAMIH), should be made available by encouraging more institutions to establish such funds and extend similar credit facility to a developer for last mile funding to complete stalled projects.

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In Hiranandani’s estimation, the current outlay of the fund of Rs. 25,000 crore, needs to be enhanced to at least Rs. 1,25,000 crore to meet the actual requirements of the last mile funding, especially after the disruption caused by the COVID pandemic.

Cash-strapped developers are turning to financially-sound builders to take over stuck projects, with stressed developers increasingly forming joint ventures, monetizing land and extending development management contracts across major cities, experts said.

According to property consultants Anarock, there were as many as 5, 02,340 delayed units across seven cities as of 2020 end, which were launched before or during 2013. Of these the maximum number of units were stuck in Delhi-National Capital Region (NCR) at 1, 90,120.

NCR-based real estate company, Migsun Group, announced last week that it is planning to take up five to seven stuck projects in Greater Noida and invest Rs 4,500 crore on their construction. "The company is planning to take up five to seven such projects spread across three crore sq ft," Yash Miglani, managing director, Migsun Group told Moneycontrol.

These projects will be developed under the joint venture and development management agreement model, he said, adding “we are hoping to complete around 1,000 such stressed units by the end of this year.”

The group recently announced the acquisition of HDFC and Ansal Properties & Infrastructure Ltd's stake in Ansal IT City Park (SEZ) Tech Zone, Greater Noida, and plans to develop the 37.5-acre mixed-use project. It has also taken over a 97-acre project from Omaxe in Greater Noida.

Gurgaon-based Alpha Corp has acquired a project in Sector 150 Noida from the Saha Group, three projects by Earth Infrastructure through the NCLT and one more stuck scheme in Gurugram. The company plans to invest around Rs 800 crore to complete the housing units.

“Completion of stressed projects is a 10-year opportunity. We are currently negotiating with foreign investment companies to put in money in these projects. These are financially viable, as there are still project receivables and areas that remain to be sold. The Earth Infrastructure projects may take six to nine months to start as licenses have expired and need to be renewed,” said Santosh Agarwal, CFO and Executive Director, AlphaCorp.

The company has, for now, set its eyes on the Delhi-NCR market and the Western region for the stressed projects opportunity.

Asked if the builder-buyer agreements (BBAs) signed between the two are redrawn, Agarwal said that “BBAs are validated and new conditions included. One of them is to do with maintenance for the next 10 years.”

Last month, Gurugram-based Tulip Infratech decided to undertake incomplete development work for Vipul's Aarohan Residences (which had become a non-performing asset or NPA) located on the city’s Golf Course Road. Under the agreement, Tulip Infratech will pay an amount of Rs 50 crore, which would be utilized for meeting debt obligation of PNB Housing Finance’s loan that was availed by Vipul.

In another development, the ATS Group has launched Nirman by ATS, a project management consultancy organised to assist developers in completing stalled projects. It has invested Rs 5 crore as seed investment towards this intellectual property (IP), the company said.

The consultancy targets to acquire over 18 stalled and delayed projects under residential and commercial segments over the next five years. In order to revive these projects, Nirman by ATS has invested in establishing a platform by on-boarding domain professionals to revive stressed projects that are under sales, construction and collection, the company said.

Under the pan-India initiative, Nirman by ATS will oversee, supervise and manage the overall delivery experience of these projects. Currently, it is assisting schemes based in the NCR.

Promoters and builders concur that stalled projects are the biggest handicap pulling down the real estate sector. Said Getamber Anand, CMD, ATS Infrastructure Ltd: ``One of the major challenges being faced by the real estate sector is the completion of stalled projects, which are majorly trapped due to the prevailing liquidity crunch. Completion of stalled projects and fast-tracking deliveries will instill positive sentiment among homebuyers and all other stakeholders. We are looking forward to providing assistance to eight projects in the first year and over 18 projects over the next five years. We have already delivered over 500 apartments in the last two years.”

Is the stressed assets opportunity sustainable?

Real estate insiders say that in case the NCLT embargo is removed, there would be a spate of stressed projects coming into the market, offering a massive opportunity to developers who have the financial wherewithal.

“Developers who have the bandwidth can take on such projects, rebrand and sell them for a decent internal rate of return (IRR),” said Anckur Srivasttava of GenReal Advisers.

However, he also warns that while there are several such cases being tried, there is no single instance where a distressed project has been resolved, i.e. end users have received the units and the lenders have got their agreed amounts. “How many NCLT projects handed over to third party developers have been completed and handed over to buyers so far,” he queries.

Srivasttava added: “While everybody is walking into the Holy Grail, there is a lot of uncertainty around how these projects will pan out because of lack of availability of capital. There are also legal and regulatory risks involved. Most properties under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, (SARFESI Act) are offered on an `as is where is’ basis and have significant legal risks involved, but those that are taken up through the NCLT route generally have these risks covered and have far greater clarity on potential as well as proven project liabilities.’’

The biggest challenge is the unavailability of capital. “While the SWAMIH fund has helped complete stressed projects, it should also actively start considering projects where a new developer has stepped into a sick project via the NCLT route and needs last mile completion financing,” he adds, hopefully.

Overall, the model that involves the resolution partner stepping in to complete the project, is still “work in progress and it is important that the capital conundrum is addressed, especially if the insolvency moratorium is not extended beyond March 24 as there is bound to be a spurt in NCLT filings,” concludes Srivasttava.

Finally, while handing over projects, the concerned authorities and resolution professionals must ensure that the resolution partner (new developer) being selected has the adequate wherewithal, both financial and operational, in order to ensure seamless execution and delivery. That is pretty much the bottom line in the real estate sector, which is still reeling under the onslaught of the pandemic and the slowdown.
Vandana Ramnani
first published: Mar 23, 2021 09:53 am

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