The bailout package for the Real Estate Sector may not improve the conditions of the sector, as the issues are not just liquidity related. Real estate developers have over leveraged themselves and there is no end demand given the high prices charged by the developers, the rising cost to income ratio and the slowdown in the economy is hurting the ability of potential buyers to service debt.
The buyer sentiment has been affected by undelivered property, high cost of loans and corruption at the developer’s level. This will not turn around in a hurry.
The primary requirement for the sector to improve its prospects is that prices should become affordable and there is comfort at the buyer’s level of the prospects for the economy and their own sustained cash flows. Both the factors are not visible.
Finance Minister on 6th November 2019 announced a Rs. 250 billion booster package to lend for completion of stranded affordable housing projects across India. As a part of initial phase, Rs. 100 billion will be funded by Government of India and rest Rs. 150 billion would be funded by SBI, LIC and other sovereign funds. The Fund will be set up as an Alternate Investment Fund (AIF), registered with the SEBI and be professionally run.
Announced booster package is a relief to homebuyers whose money is stuck with stalled projects. However, there are significant challenges in its implementation due to various stakeholders who are involved in real estate projects. In terms of how much will the extent of stressed debt will get benefited from this scheme has to be watched carefully as Rs. 250 billion is just 6% of the real estate loan book in India.
From a listed developers perspective, none of the related projects are stuck for want of liquidity and hence, there would be no direct impact on such developers. In terms of debt, there has been significant reduction of debt when compared with last 4 years but they are sitting on a huge pile of unsold inventory, which is huge risk to lenders. Proper implementation of this scheme would also help NBFCs in terms of reducing NPAs as NBFC’s have highest market share in terms of real estate loans in India i.e 51% ( Source : CRA report).
Which projects are eligible to receive funding?
1) Networth-positive: Value of receivables from sold units and unsold inventory put together should exceed the cost to completion at the project level.
2) Affordable and middle-income housing projects: The government has capped the ticket size of the units to Rs 20 million for Mumbai, Rs 15 million for other Tier-1 cities and Rs 10 million for all other cities.
3) Registered with RERA: The government estimates that a total of 1,600 RERA-registered projects with 458,000 units are stalled for lack of funds and stand to benefit by the announcement of the Fund.
4) Projects classified as NPA and those in NCLT are eligible: During the initial announcement in September 2019, the FM had kept the NPA and NCLT projects out of the purview of the Fund. However, such projects will now get funding, unless a liquidation order has been issued.
