Increase size, scope of stressed real estate fund

Finance Minister Nirmala Sitharaman had announced the setting up of a Rs 25,000-crore alternative investment fund (AIF) in 2019 to provide last-mile funding to incomplete brownfield projects, thereby providing relief to developers with unfinished projects and ensuring delivery of homes to buyers.

While the government has earmarked Rs 10,000 crore towards the fund, Life Insurance Corporation of India (LIC) and State Bank of India (SBI) have also infused funds. This was a great step to improve the plight of incomplete projects languishing due to the lack of funds.

Given the large number of incomplete projects, the government may consider enhancing its contribution to the Special Window for Affordable and Mid-Income Housing (SWAMIH) fund from the current Rs 10,000 crore to Rs 20,000 crores through a supplementary grant in the Budget.

Since the government’s contribution is supplemented by LIC, SBI and other financial institutions, an increase of Rs 10,000 crores would result in the fund greatly swelling in size. A higher government contribution will have a multiplier effect as it would not only benefit a large number of people who aren’t receiving possession of their homes but also help Housing Finance Companies (HFCs), banks and non-banking financial companies (NBFCs) to reign in non-performing assets(NPAs).

The government may also consider opening up the fund to overseas investors on the lines of National Investment and Infrastructure Fund (NIIF). This would bring in a lot more capital to complete stalled projects benefiting a large number of people. Globally, the concept of distress asset funds or scavenger funds as they are often called is very wide spread and opening up would bring in capital as potentially bring in expertise which could be used to improve the sector as a whole.

Allowing foreign funds into the SWAMIH fund would allow the fund to lower its Internal Rate of Return (IRR) expectation from 12 percent to around 10 percent, as foreign funds have a lower cost of capital, this will allow more projects to get sanctioned by the fund. Initially, IRR of fund was 15 percent as defined by SBI CAP Ventures, this resulted in a lot of projects not being able to make the criteria to qualify for funding. Having a lower IRR is essential to increase the scope of the fund and to reach the maximum number of stalled projects.

Two big projects that come to mind where the fund has had success is Mumbai’s CCI Rivali Park and Urban Land Amangani, Rewari. Both have started offering possession, all the fund now needs is a scale to truly achieve its objective. As SWAMIH has received over 300 applications for funding, expanding the fund size is probably the only way to reach out to so many projects and provide relief to home buyers.

Relax FDI limits in housing

The government’s foreign direct iInvestment (FDI) policy in real estate is one area they could have a relook. We have seen FDI liberalization in a couple of sectors, including a critical sector such as defence production, as part of the Atmanirbhar reforms. I think the time is ripe for the government to relook at the FDI policies in real estate.

The policy mandates a minimum built-up area 50,000 sq mt for FDI in construction development projects and for serviced housing plot, more commonly known as plotting schemes, the minimum area is 10 hectares.

We would urge the government to relook at the minimum built-up area and land requirements. Having such large projects and land parcels is difficult in metro cities.  By reducing the built-up area and land requirement, the sector will attract a lot more foreign capital.

A lot of developers are facing a liquidity crunch and stressed balance sheets, liberalising FDI will go a long way in helping players forge partnerships and de-leverage their balance sheets.

Relief to real estate-focused NBFCs

The Reserve Bank of India (RBI) in April 2020 allowed for loans by NBFCs to the commercial real estate sector. An additional year has been given for the extension of the date for the commencement of commercial operations (DCCO) under Atmanirbhar 2.0. This essentially gave borrowers an additional year to repay their loans.

We request the government to deliberate with the RBI to Extend the DCCO for one more year as the commercial real estate sector has borne the brunt of the pandemic. We are continuing to see many companies working from home and we understand from industry sources that vacancy levels in a lot of office complexes are expected to rise. In addition, it is being suggested that demand for new office spaces is unusually low-key as of now;

Extend the same facility for construction loans given to the residential sector. It would go a long way in helping the industry come out of the pandemic-induced crisis. While construction on a large number of projects was stalled for the most part of the year, developers are bearing interest costs on the loans they availed. To help the developers, the government can extend the DCCO benefit to loans by NBFCs to residential projects as well.  If the benefit is extended to residential projects, it will save a number of project loans from being classified as NPAs, thus allowing builders more time to complete their projects unhindered.

The pandemic has brought about a liquidity crunch for most financial institutions, especially those focused on lending to the real estate industry. To help address the situation, the Finance Minister extended a Rs 30,000 crore special liquidity window for NBFCs that are finding it difficult to raise money from the market.

Under this scheme, investment will be made in both primary and secondary markets in investment-grade debt papers of NBFCs, HFCs and microfinance institutions (MFIs). This would provide liquidity support for NBFCs/HFCs/MFIs, thereby creating confidence in a spooked market. Further, a Rs 45,000 crore partial credit guarantee scheme 2.0 was also unveiled for NBFCs, HFCs and MFIs with low credit rating to help them extend loans to individuals and small businesses.

While the measure taken by FM have improved the liquidity situation, we feel an additional special liquidity window can be offered specifically to HFCs, particularly to those engaged in lending to affordable housing and mid-income housing space. This would enhance the liquidity and lending ability of HFCs which would allow them to go and undertaking fresh lending in the market.

HFCs increased lending will help end-users buy their desired properties, taking advantage of low-interest rates and stamp duty benefits being offered by many states as well as discounts offered by builders. Additional lending by housing finance companies would lead to a structural improvement, as unsold inventory can be absorbed by end-users and first-time homebuyers, generating cash flow for stressed developers. Earmarking a liquidity window specifically for HFCs will go a long way in alleviating the pains of the real estate industry.

This article was originally published in Money Control on 1 February 2021 Written by: Ashoo Gupta, Partner. Click here for original article

Read Less-