Too little and too late again

Moreover Rs. 25000 crores are not enough to revive a real estate sector where lakhs of crores are stuck. A much bigger budget is needed

Mumbai: India’s real estate sector has now been facing a crippling crisis for over five years. In these years it has been severely impacted by multiple factors which have included demonetization, GST, government’s war against black money, a crisis in the NBFC and banking sector, record unemployment in India, the general economic slowdown and most significantly the onset of RERA which has proved to be a game-changer for the better. While RERA has changed the entire paradigm of the real estate business and unemployment and the economic slowdown has decimated demand for houses, the others have cut off the supply of funds to the industry inflicting a liquidity and business crisis. So pathetic is the scene that in the past 9 months alone, the bankruptcy applications related to real estate developers filed in the NCLT have doubled to 421 and the successive pruning of interest rates by the RBI has failed to revive demand for houses. Now after the default by Altico and frauds by DHFL, the markets are suspicious of the real estate industry even more, such that with about Rs. 75000 crore worth loans to the real estate sector falling due in the first half of 2020, there is an apprehension that there will be rampant repayment defaults by builders, which will also trigger a fresh NPA crisis in banks. The situation is so bad that the government’s recent measures to revive the sector, have failed to yield any results. India’s builders now sit on a record unsold inventory which does not sell despite discounts being offered by desperate builders.

A recent report says that there are residential real estate projects worth $ 63 bn which are stalled across the country and their developers are in a debt trap with banks and NBFCs. Lenders have stopped giving fresh loans to builders, who are unable to sell the properties, only increasing the chances of a further default by builders to banks and NBFCs.

The Government has thus been desperate to revive the fortunes of the real estate industry. It has provided over Rs. 50000 crores to housing finance companies, hoping that loans to home buyers will shoot up and has also set up a fund of Rs. 10,000 crores in September, in order to provide last-mile funding to stalled real estate projects which are at least 60% complete, provided that they have not defaulted to banks and NBFCs, which is unlikely. This real estate fund set up by the government in September proved to be a non-starter, with few eligible takers for it.

A worried government has now set up a much larger real estate fund, on more liberal terms, so that the stressed sector is eligible to avail of loans for completion of stalled projects. The FM announced the set up of a real estate fund of Rs. 25,000 crores for this purpose, with the government putting in the initial corpus of Rs. 10,000 crores and the balance Rs. 15,000 crores to be subscribed by SBI and LIC. These projects involve construction of housing units not exceeding a carpet area of 200 sq. meters, which are priced up to Rs. 2 crores in Mumbai, up to Rs. 1.50 crore in other metros and up to Rs. 1 crore in other cities are eligible for such funding, provided that there is no fraud or diversion of funds by the promoters, are RERA registered, are in their final stages of completion, are not mired in court cases, either in the High Court or in the Supreme Court, and must be net worth positive. It is estimated that 90% of over 1600 projects all over India, involving 458000 residential units could be eligible for financial assistance from this fund and Mumbai based projects are expected to be the biggest recipient thereof. The focus of the fund remains on funding affordable and middle-class housing residential projects.

With over Rs. 4.50 lac crores of loans and matching promoters capital blocked in real estate projects, the real estate sector has been a major contributor to India’s liquidity crisis and economic slowdown. A revival of these stalled projects will help to unlock and free the huge capital stuck in them, it will help the middle-class buyers whose capital is blocked in these unfinished projects, it will energize the real estate and connected sectors such as cement and steel and jobs will come back. This is a prudent move by the Government except that it’s a little and too late also. The sector’s huge stress has been evident for quite some time and such a remedial measure was warranted much earlier. Moreover Rs. 25000 crores are not enough to revive a real estate sector where lakhs of crores are stuck. A much bigger budget is needed. And this move comes with the caveat that project completion is of little use if demand for houses does not rise and moreover, expect no quick results. It will take at least 18 months before the results of this initiative set in.