The domestic real estate sector is facing numerous headwinds leading to multiple spillover effect. The issues include reduced demand for homes, piling up of inventory, stalled projects due to the liquidity squeeze and rising customer dissatisfaction.
Real estate, a key sector of the economy, drives demand in many industries such as cement, steel, building accessories, ceramics and others. It provides employment to lakhs of people -- both skilled and unskilled. It’s an engine of growth that has lost momentum and needs to be kickstarted. For, this will drive consumption in the economy and investments.
Seen against this backdrop, the announcement by the Union finance minister to create a Rs 25,000-crore fund for stalled housing projects is the much needed relief and is widely acclaimed. It will provide last-mile funding of affordable and mid-segment housing projects. The latest proposal is wider in scope than the previous proposal -- as of September 2019 -- by Rs 5,000 crore.
The fund will enable completion of projects with a unit size of Rs 2 crore in metros and Rs 1 crore in non-metros and is estimated to cover 4.58 lakh eligible units (up from 3.50 lakh units under the previous proposal). Further, those incomplete RERA-registered, positive net worth projects with NPAs or under NCLT proceedings but not marked for liquidation are eligible. This implies projects having residual cash flows after completion of project cost and meeting all external obligations.
The proposed fund to be managed by SBICAP Ventures will provide priority debt funding to the eligible projects. The details on the due diligence and timelines of the selection process are yet to be finalised.
However, some key monitoring tools have been formalised, including routing of project-wise funding through an escrow account in a phased manner, which will be linked to the progress in construction. Constant monitoring by the investment manager not only facilitates efficient and timely completion of projects, but also offers relief to distressed homebuyers, in cases where the intent of the developer to complete the project is in doubt.
The government has also suggested deployment of external management companies to aid project monitoring. Continuous engagement with existing lenders will, therefore, be important.
The proposed fund assumes more importance because of the ongoing NBFC liquidity crunch, which intensified from the second half of the last fiscal. NBFCs over the past few years have become an important source of funding for the real estate sector, more so in the context of scant customer advances. The fund is also expected to provide last-mile funding for the stuck but viable projects, which could alleviate the stress.
On the flip side, there are concerns that the fund size could prove small and may have to be expanded up to Rs 35,000-45,000 crore to fund completion of 4.58 lakh eligible dwelling units. Besides, there may be delays in implementation and demand risks for the unsold inventory.
In the current demand context, almost 50 percent of the project inventory is unsold, which is further aggravated by the weak macroeconomic scenario.
Notwithstanding the expected improvement in saleability once the project gets completed, the sales of balance inventory and final recovery of debt obligations will be critical factors to look out for. The investment manager may also have to factor in the return expectations of private investors of the eligible projects, which may narrow down the pool.
Also, other key areas pertaining to debt structuring remain unclear at present -- What is the flexibility available to the existing lenders of the project to restructure debt obligations in a manner that facilitates project completion. Moreover, the positioning of the AIF infused funds, relative to the existing project debt, in terms of seniority and collateral sharing, will have to be addressed in a manner acceptable to all the financial stakeholders.
In light of the above and in conclusion, it can be said revisions in eligibility criteria appreciably expand the project coverage under the fund, especially given the large number of stressed projects that have been referred to the NCLT or classified as NPA already.
Despite the uncertainties, the fund will contribute to the revival of the real estate sector and thereby, the economy to some extent. It will be positive in the long term, provided all objectives are met. The creation of the fund is expected to benefit the existing customers in stuck projects by aiding project completion.Shubham Jain is Group Head and Senior Vice-President, Corporate Ratings, ICRA Ltd. Views are personal.