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Explainer: All you need to know about special funding for stalled real estate projects

Finance Minister Nirmala Sitharaman said the government will put in Rs 10,000 crore in this Alternative Investment Fund (AIF) while State Bank of India and LIC would together provide Rs 15,000 crore, taking the total size to Rs 25,000 crore

On November 6 the government approved the creation of a Rs 25,000 crore 'professionally managed' fund to boost stalled middle and low-income RERA registered housing projects that are not worth positive.

Finance Minister Nirmala Sitharaman said the government will put in Rs 10,000 crore in this Alternative Investment Fund (AIF) while State Bank of India and LIC would together provide Rs 15,000 crore, taking the total size to Rs 25,000 crore.

The fund seeks completion of the 1,508 projects comprising about 4.58 lakh units. It can be utilised even by the projects which have been declared non-performing assets (NPAs) or are facing insolvency proceedings.

The fund seeks to provide relief to builders who require last-mile funding to complete stuck projects. The Finance Ministry in its FAQs said the maximum funding for any single project seeking assistance from the 'special window' or AIF would be Rs 400 crore.


Homebuyers, especially those paying easy monthly instalments (EMIs) and rent for years, are expected to benefit from the funding as it may help revive stalled projects leading to early completion and timely possession.

Here is a look at how the fund will benefit both buyers and builders and the challenges that remain to be addressed.

Which real estate projects will make the cut?

- Projects that require last-mile funding to complete construction

- Projects in the affordable and middle-income category

- Net worth positive projects that also include NPAs and those undergoing National Company Law Tribunal (NCLT) proceedings

- Projects registered under the Real Estate (Regulation and Development) Act, 2016 (RERA)

- Priority will be given to projects that are nearing completion

What are net worth positive projects?

As per the Finance Ministry FAQs, net worth positive projects for the purpose of funding through the special window shall mean those projects where the value of receivables plus the value of unsold inventory is greater than the completion cost and outstanding liabilities at the project level.

Simply put it means whether there is enough juice in the realty project for the investor to take over. The investment manager would first want to assess if the real estate company would be in a position to continue paying interest and whether there would be enough revenue to be earned by selling its unsold units. The revenue from the project should be more than the cost and the liabilities attached to it. It should have a positive revenue statement.

"If the total receivables in a project are Rs 100 crore but construction cost is Rs 300, that project may not be picked up at all. Each project would be evaluated on a case-by-case basis by the fund managers," Vikas Wadhawan, Group CFO, Elara technologies, the real estate technology platform that owns PropTiger.comHousing.com and Makaan.com said.

"Builders will have to self-assess in terms of whether they qualify for the funding. They will have to prove that they are revenue positive on their projects," Avnish Sharma, partner and Khaitan & Co. said.

Finally, this special window is not a welfare scheme or a loan waiver. It is a fund that seeks repayment. Therefore, the real estate project needs to have residual potential for repayment.

Will real estate developers be able to pay back dues to authorities/banks and refunds to homebuyers?

The Finance Ministry FAQs clearly state that the special window is meant for projects that are stalled for lack of construction funding. The end use of the monies of the fund is for construction and completion of the projects.

Divya Seth Maggu, Director, Valuation & Advisory, Colliers International India says that the investment manager along with developer/appointed project management companies would ensure that the end-use of funds is only for the purpose of completing the project.

Standard financial controls maintained by RERA will be adopted. Thus, the usage of these funds towards other purposes would not be permitted.

The primary intention of the fund is to ensure completion, construction and development. It will be done through an escrow account. The last-mile funding is extremely end-use specific, says Sharma.

As per reports, the development authorities in Delhi-NCR’s Noida area, GNIIDA and YEIDA collectively have over 200 ongoing housing projects and 90 percent of projects have defaulted on payments.

Realtors owe around Rs 28,000 crore to these authorities alone, not to mention the amount they owe as an interest to banks and the requests of the refund to homebuyers they have to cater to.

According to some experts, builders have not paid land costs on time either due to over-leveraging, diversion of funds to acquire more land banks, litigations over land acquisition halting work at project sites or due to market conditions.

Builders have been lobbying hard with the Uttar Pradesh government to provide for interest waivers and zero period waiver for the period construction was stopped. And this relief may be in the offing going by the chief minister Yogi Adityanath’s promise at the November 4 National Rera Conclave that there may be a ‘big’ announcement in a week to revive stuck housing projects in the state.

Manoj Gaur, Managing Director of Gaursons India says that as per forensic audits carried out by RERA and both the authorities in Noida, at least 25 percent real estate projects in the region are cashflow positive despite owing dues to the authorities.

"Some of these dues are unwanted and in many cases, interest has been charged basis an archaic system of compounding. If these are rationalised, a lot more projects will get completion certificates and become cashflow positive," Gaur told Moneycontrol.

Credai is of the opinion that the special window for funding announced by the government should permit payment of dues for land.

"Projects cannot be constructed without land, even under RERA, 70 percent amount for a project is escrowed for construction and land. Even if construction gets completed and dues on land remain, a developer will not get a completion certificate. The same problems will persist," he said.

Will Delhi-NCR or Mumbai get the larger pie of the funds?

The special window is open to affordable and mid-income housing projects wherein dwelling units do not exceed 200 square metre carpet area and are priced up to Rs 2 crore in Mumbai Metropolitan Region, up to Rs 1.5 crore in National Capital Region, Chennai, Kolkata, Pune, Hyderabad, Bengaluru and Ahmedabad, and up to Rs 1 crore in the rest of the country.

As per an estimate by Liases Foras, more than 30-40 percent of stressed projects across the country may qualify for the fund. Not all of 1,600 projects will see the light of the day.

Pankaj Kapoor, founder and Managing Director, Liases Foras, points out that even though the majority of housing units are stuck in Delhi-NCR, it is the projects in MMR that have more potential for resolution than NCR. Therefore, the utilisation of funds will be higher in MMR.

"The fund is meant for construction. In Mumbai, construction cost contributes only 15 percent and in NCR construction cost is as high as 30-40 percent and the prices are lower. Majority of the funds will, therefore, be utilized by MMR, Bengaluru and Pune," Kapoor says.

What happens to units that surpass the size limit of 2,150 sq ft?

The Finance Ministry FAQs clearly state that housing units and villas up to 200 sq mt or 2,150 sq ft will qualify for the last mile funding. What happens if the apartment is bigger or for that matter if the top floor of a building has a penthouse of 3,000 sq ft?

Experts point out that more clarity may be required on this. In any case, there may be very few cases of combination units in housing projects.

"A test may be looked into to see if the substantial development/substantial units in the building are less than 2,150 sq ft. What this means is that if 75 percent units in a project are above 3,000 sq ft, then the project may not be eligible for funding. However, if a large number of units are of around 2,000 sq ft, the project may make the cut," opines Sharma.

Issues that remain unanswered

Timeline is unclear. Due diligence and evaluation will take time, nothing less than six months, say experts adding it is a fund with several stakeholders and creditors and the process may take longer to get everybody on board.

There are still many questions about how the fund will actually operate and the terms and conditions that it will provide to developers.

"The modalities of how the fund will be applied for, the rate of interest, status of projects already financed by banks and the arrangement with these banks going forward, escrow accounts to be opened, whether last-mile funding will be credited in a new escrow account or an existing one, will it be last in first out, how scrutiny takes place – all these issues remain unanswered," says Gaur.

The fact that the last mile funding is also open to projects that are NPAs or undergoing NCLT proceedings is a welcome move but several issues remain.

"Who will apply for funding - the resolution professional in control of the company or the committee of creditors? What happens in cases where the CoC has approved a resolution plan, will it be the resolution applicant or the person who has bid for the company? Lastly, what will happen to the entire NCLT process? All this will have to unfold," Sharma points out.

Companies that are NPAs are still less complicated as banks have declared them as NPAs and no insolvency process has started against them. The control is still with the promoter and therefore he can apply for the funding, he explains.

Another question is if a large number of stalled projects are completed, yet remain unsold, they would simply add to the existing inventory in a slow real estate market.

"The demand-supply imbalance is likely to worsen, and if overall housing demand does not witness a recovery, pricing pressure in the sector is likely to be exacerbated," said India Ratings and Research.

Mahi Agarwal, AVP and Associate Head, Corporate Ratings, ICRA, says that viable projects have not been specifically defined.

"However, the fund has been created with the objective of providing priority debt financing to net-worth positive projects, with the same being defined as projects having residual cash flows from receivables and sale of unsold inventory, post incurring the project completion cost and meeting all external obligations.

This assumes that all project and debt related obligations are expected to ultimately be serviced from the project cash flows, with the housing fund providing liquidity to tide over a prevailing lack of construction financing. While the permitted end-use of this liquidity has been categorically stated as only for the completion of the construction of the project, nuances in terms of use for payments to authorities and other stakeholders are yet to be clarified," he said.

Vandana Ramnani
first published: Nov 9, 2019 09:34 am

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