Govt's Rs 25,000 crore realty fund can only help 6% of stalled constructions

By Abhijit Roy Chowdhury, Bibhudatta Pradhan and Dhwani Pandya

India’s plan to set up a 250 billion-rupee ($3.5 billion) fund to salvage stalled residential projects will only be sufficient to complete about 6% of constructions that are running behind schedule in Asia’s third-largest economy.
The new program announced by Finance Minister Nirmala Sitharaman on Wednesday is an improvement on a $1.4 billion real-estate corpus announced in September and, unlike the previous plan, it will also support projects written off by lenders as bad loans. With $63 billion of housing projects stuck for lack of funds, the latest measure will help unclog the financing pipes, said Anuj Puri, chairman of Anarock Property Consultants.

The fund size isn’t enough to cover the entire problem but will act as a “lubricant to start the wheel that had been jammed,” Puri said in an interview to BloombergQuint. Once projects are revived and completed, money will start circulating in the system, which will help all developers, he said.


Prime Minister Narendra Modi is keen to revive the real estate industry to boost demand and kick-start an economy that’s expanded at the slowest pace in six years for the quarter ended June 30. Still, developers say authorities need to carefully structure and price the fund, and roll it out quickly, for it to succeed.

Funding will be available to projects that are: (a) Net-worth positive (cash flow higher than project cost) (b)
Fall within the so-called affordable and middle-income segments (as much as 20 million rupees) (c) Must be 70% complete

The new fund “will be in the form of an alternate investment fund with the government contributing 100 billion rupees,” Sitharaman said. State-run insurer Life Insurance Corp., State Bank of India and others are likely to contribute the remaining 150 billion rupees.

There are 1,600 stalled housing projects with around half a million incomplete dwelling units that could benefit from the fund, Sitharaman said. The decision was taken after a discussion with stakeholders and the central bank.

The fund could take as much as six months to be operational, screening of eligible projects will need time, and “at best” will help around 16% of stalled projects “over a period of time,” Jefferies analysts led by Bhaskar Basu wrote in a note.

In all, about 576,000 projects worth some 4.6 trillion rupees ($63 billion) are running behind schedule across seven big Indian cities, according to Anarock data.

A series of shocks in the last few years, from the unexpected withdrawal of high-value rupee notes in 2016 to the sales tax introduced the following year, have dented property-market sentiment and caused funding for developers to dry up.

“The devil lies in the details,” Boman Irani, chairman of Mumbai-based developer Rustomjee Group, said by phone. For the fund to be viable, real estate companies mustn’t have to pay more than 9%, which may hamper interest from external investors, he said.

This last-mile funding should be made the most senior debt in the waterfall, according to analysts at Nomura Holdings Inc. and Anarock’s Puri.

An analysis of about 11,000 home builders by research firm Liases Foras in February showed that developers on average have to repay twice as much in debt each year as the income they generate that can be used to service it. This comes as property prices in India’s biggest cities are flagging -- home values in Mumbai sank 11% last year following a 5% decline in 2017. India introduced a law with strict punishments for building delays in 2016.

The inclusion of projects that had been written off as bad loans will benefit several incomplete housing projects in areas like Noida near New Delhi, according to Niranjan Hiranandani, president of the National Real Estate Development Council. Across Indian metropolitan regions, homeowners had been banding together to complete unfinished apartments and free up their money that had been stuck in these developments.

Stalled projects are at the center of a slowdown in the country’s property market and a key reason for mounting default risk of the developers.

“There are several genuine developers who are solvent, however are facing a liquidity challenge due to various reasons as sales have slowed down and buyers prefer to buy ready-to-move-in apartments, said Ashok Mohanani, chairman of developer Ekta World. “This funding will enable such Developers to complete their projects.”