If there were a genie in a magic lamp that could be summoned to grant wishes, the floundering real estate sector would ask for working capital to complete stalled projects, and homebuyers would ask for possession of homes in which they have invested their hard-earned savings.

Finance minister Nirmala Sitharaman tried to play the role of the genie when she announced a mega bailout fund of ₹25,000 crore to provide capital to 1,600 stalled housing projects in the affordable and middle-income category, relief to homebuyers, and a booster shot for a weak economy. However, while the intention is good, and is undoubtedly a step in the right direction, is it also a case of too little, too late?

Srini Sriniwasan, managing director and chief executive officer, Kotak Investment Advisors, says the guidelines are not clear at this stage and a lot more needs to be done to effect a meaningful change to uplift the real estate sector from its current troubles. “Several recent initiatives announced by the government have been non-starters for lack of clarity. The bailout fund targets to aid last-mile funding, but there are many grey areas that may create roadblocks for smooth execution,” agrees Ajit Mittal, executive director, Indiabulls Housing Finance.

For a housing project to be eligible to avail capital, it must be net worth positive and 70% complete. Furthermore, the housing unit must cost under ₹2 crore in Mumbai; ₹1.5 crore in Delhi-NCR, Chennai, Kolkata, Bengaluru, and Pune; and ₹1 crore in other cities. The alternative investment fund will attract ₹10,000 crore from the government, ₹15,000 crore from State Bank of India and Life Insurance Corporation, and sovereign wealth and pension funds. The government stated that the creation of such a special window would revive the real estate sector, and generate considerable employment and demand for cement, iron, and steel—which in turn would release stress in major domestic sectors.

Many housing projects are mortgaged to lenders. Loans worth over ₹71,000 crore to the real estate sector is scheduled to come up for repayment in the first half of 2020, according to a Fitch Ratings report, highlighting the high degree of risk for lenders in case of default.

“If a project is encumbered by one or more lenders or other creditors then how can the project avail additional funding, since it may already be mortgaged. That’s a serious problem in my view,” adds Mittal. “I don’t know if it is viable to invest money in a project without complete knowledge of the loans taken in the past, tax dues, and other pending clearances,” Sriniwasan says.

Trouble started brewing in the realty sector six to seven years ago. Now, developers find themselves caught in a complex and (in some cases self-created) vicious cycle. Non-availability of funds has led to stalled projects, and the reluctance to reduce prices has led to an inventory pile up. Until developers complete projects and sell units to generate revenue, banks are unwilling to extend fresh loans. This logjam coupled with economic challenges has brought the sector to a standstill.

“There are many projects which are near completion but have not been able to garner last-mile funds. [They] will benefit from this move. This step will definitely create greater confidence and credibility and may, in due course, encourage private segments to extend their support in last-mile funding, helping the beleaguered sector to go over this period of slowdown,” notes Shishir Baijal, chairman and managing director, Knight Frank India.

The ongoing liquidity squeeze has dealt the final blow to the cash-strapped sector as financing from NBFCs has dried up. Data compiled by Anarock indicates there are close to 576,000 projects worth ₹4.6 lakh crore in various stages of completion in seven big cities that are stalled or delayed. “Projects need to be completed for value, and this requires capital which is not available to developers,” says Prateek Jhawar, director and head-infra and real assets, Avendus Capital.

Jhawar says the government’s bailout fund will deftly tackle the two main problems of project viability and liquidity that riddle the real estate sector. He adds it could be 12-18 months before the move has an impact on the ground, if it is executed effectively. Niranjan Hiranandani, managing director, Hiranandani Group, says, “The initiative is a win-win for home buyers and real estate developers, but the devil in the detail in this case will be quick implementation.”

Prashant Kumar, chief financial officer, State Bank of India, says implementation is the core issue, and it will take at least six months till the fund is up and running. “We need to hire teams, put systems and processes in place for good governance, and frame the investment philosophy to guide the fund,” Kumar says. State Bank of India will play a key role in the management of the fund.

The special window funding is available to net worth positive projects including NPAs and those referred to the National Company Law Tribunal, but not put on the block for liquidation. Yet, in its current form, the ₹25,000-crore fund can finance less than 10% of the 576,000 stalled projects. Experts say the mandate is not static, and may be diluted if required in 6-12 months. While the initiative may not be the answer to the challenges in the sector, it is at best a sign of the government’s resolve to reignite the economy’s animal spirits.

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