Aurelia Menezes and Raghav Gaind
The announcement of a Rs 25,000-crore alternative investment fund (AIF) provided a new direction to real estate companies stuck at a crossroads. The time is so unfavourable for the sector that all major players are either bankrupt or on the verge of getting bankrupt.
The above scenario was pulling the ship of the Indian economy down deep into the sea and a rescue was much needed to get it back on the surface. On November 6, 2019, the government went in for the AIF for affordable and mid-sized housing to aid the troubled sector.
The government has clarified that it will contribute Rs 10,000 crore for which SBICAP Ventures has been appointed to ensure the funds are being used for the intended destination. The rest Rs 15,000 crore will be brought in by State Bank of India and Life Insurance Corporation of India, besides wealth and pension funds.
Further, the government has stated that this funding will only be available to certain stalled real estate projects which fulfil the laid-down criteria. These include
- Projects halted due to insufficient funds
- Affordable and mid-sized housing projects
- Those registered under Real Estate Regulation Act, 2016 (RERA)
- Only NPA and NCLT projects are included
- The ones close to completion
In addition, the government has said the scheme shall be valid only for the houses whose value is less than Rs 2 crore in Mumbai, Rs 1.5 crore in the National Capital Region (NCR) and Rs 1 crore in other parts of the country. Any villa whose value is less than the stated figures is also under the ambit.
Demonetisation of 2016 and introduction of GST in 2017 are a few of the major economic shocks that dented the property market, creating a funds shortage for developers. All these factors slowed the pace of the economy to an extent that one can say it’s hardly growing.
In February 2019, a survey of 11,000 home builders was conducted by the government to help understand the situation in a more professional manner. It found out that developers are paying twice as much in debt every year compared to the income generated.
This is evident from the fact that the property prices in all metropolitan cities have come down to the ground level. As an illustration, the home value in Mumbai plummeted 11 percent in 2018 following a 5 percent decline in 2017. Further, the number of total stalled projects in Mumbai and the NCR has gone sky high where 4,00,000 units are yet to be completed.
This pushed India to introduce the Real Estate Regulation Act, 2016 ('RERA') with strict punishments for any building delay. The announcement did not actually solve the crisis at hand, but further escalated it for homebuyers in Mumbai and the NCR.
Therefore, this emergency fund is seen as “critically important” as it would benefit not only developers but also homebuyers. This ‘Special Window’ eliminated any ambiguity that may crop up in timely setting up of the funds by builders.
There is a realisation that if the real estate sector is unable to pay off its debt within the first half of 2020, it will affect a number of mainstream banks and NBFCs. Going by the available data, a number of these realtors may miss the deadline as many are going through the insolvency resolution process.
The emphasis on the real estate sector is part of the government’s broader plan of boosting the economy, with growth slumping to a six-year low of 5 percent. Though the government’s actions are worth an applause, there is a crucial need of more such reforms in taxation to revive an already dead sector. And the same can also be achieved by boosting and building the affordability demand in the market.
For now, the real estate sector has been given a big push and hopefully, it utilises the opportunity well and wisely in the coming years. Aurelia Menezes is partner (corporate), and Raghav Gaind is associate (corporate), King Stubb & Kasiva, Advocates and Attorneys. Views are personal.