25, 000 crore infusion in the real-estate sector – What does it mean?
Finance Minister Ms. Nirmala Sitharaman announced a Rs. 25, 000 crore Category – 11 Alternate Investment Fund (AIF) for stalled real-estate projects. This is expected to revive the real-estate sector.
AIF would be a debt fund registered with SEBI and would be professionally run. The government will act as a sponsor and it would infuse Rs. 10, 000 crores. SBI and LIC would contribute the remaining Rs. 15, 000 crores towards the fund.
This fund is expected to bailout at least 1600 stalled projects, mainly in the affordable and middle-income categories.
Where do we stand in terms of stalled projects?
There are about 5.76 lakh units, launched in 2013 or earlier and are stuck in various stages of non-completion across seven cities in the country.
4 lakh units are left unfinished in the Mumbai Metropolitan Region (MMR)and National Capital Region (NCR). In monetary terms, the approximate value of projects running behind schedule in these two regions would take about Rs. 3, 60, 000 crores to complete.
Across all the seven cities, the amount of funds required would be about Rs. 4, 63, 000 crores. The debt fund announced by the government is a good starting point though it is well below the industry needs.
The good news is that a number of sovereign and pension funds have also agreed to invest in the emergency fund in due course to pull the sector out of its current troubles.
Complexity in the ecosystem
Many projects have been declared bankrupt and are at various stages of liquidation with NCLT. In addition, many projects that have borrowed heavily from various real-estate funds, banks, and NBFCs have not been honoring their payment schedules and the interest rates have added to their borrowings.
According to Fitch Rating, the real estate sector in India is expected to repay loans to the tune of $10 billion or Rs. 71, 000 crore in the first half of 2020.
How would the government address all of these accumulations?
There are no straightforward answers to this as the real-estate non-performance have put the financial and investment community in a big spot of bother.
Most NBFCs have nowhere to go except to get their investments back to stay relevant or they would go belly up. A case in example is Infrastructure Leasing and Financial Services (ILFS).
Going forward
Government has hit the bull’s eye by setting up this stress fund. Now, they need to offer many other sops for the industry to really revive.
After all, real-estate industry is closely related to many allied industries and all their growth in the last few years have been really slow due to the slump in new projects and unfinished existing projects.
Certainly, there is a need to introduce more reforms in taxation, stamp duty and GST. India probably has one of the largest stamp duty charges in the entire world.
In addition, home borrowings, if they are pegged at a lower level of interest, it would augur well for the industry.
Let us wait and watch how this fund helps in reviving the real-estate sector
