Once the money comes to some projects, it will unclog the financial system.


There has been widespread acknowledgement of the slowdown in the real estate sector. So if you look around some of the posh areas of Delhi NCR and Mumbai—two of India’s costliest (and toniest) real estate destinations—you will be taken aback by the presence of many “ghost buildings”. These are structures where either construction has stopped midway because builders ran out of money to complete them or have been completed but have no takers since they are too expensive and the promoters and banks backing them cannot sell them cheaper since project viability is at stake. The former is more representative of the Delhi NCR scenario, while the latter is more endemic in Mumbai.

A slump in the real estate sector—as has been the case since 2014—has a cascading effect on most sectors of the economy; the reason why many have been seeking the government’s intervention. From millions of homebuyers who are stranded due to the non-delivery of projects to banks and financial institutions who have funded these projects and are now staring at massive non performing assets, all are tied to the fate of these real estate companies. Not to mention allied sectors like steel, cement, power, paints and electrical equipment that have witnessed a demand slump due to the real estate slowdown, and lastly the scale of job losses due to realty woes also makes a case for more than just few quick fixes for the sector.

The government has intervened. In a welcome step, to alleviate some of the stress, the Finance Minister announced a Rs 25,000 crore ($3.5 bn) revival plan to boost Indian realty. Finance Minister Nirmala Sitharaman, who has been holding widespread consultations with stakeholders in the last two months, announced a realty package that is aimed to complete some of the “stuck” projects. The proposed escrow account will have government agencies and institutions like LIC, SBI and Sovereign Funds creating a corpus that will identify projects in the mid segment range (Rs 2 crore and less) in two most important markets of Mumbai and NCR. And perhaps for the first time, the focus is not just the affordable housing segment (sub Rs 45 lakh) but also the middle-income home buyers who till now have been left in the lurch amidst more and more real estate companies throwing in the towel.

But the devil lies in the details.

Firstly, the scheme would exclusively target those that are RERA registered and net worth positive projects, which means cash flows from the project are expected to be positive, post availability of credit for construction. Most of the projects will not fulfil this condition due to delayed payments and additional penalties and interests. In fact, most of the Noida projects that are stuck have penalties and interest payments higher than the principal amount. Add to it the challenge of structuring and implementation since builders typically operate across projects and rotate money from one project to the next, making the task of ascertaining project cash flow difficult.

Second, the last-mile funding will benefit homebuyers where most of the project cost has been paid for by the buyers and the project is completely sold and completion is delayed due to funding constraints of the builder. This would help projects that are less than one year away from completion and will also relieve balance sheets of banks and housing finance companies and the like have exposure to such projects, it would help alleviate their stress.

Obviously, for projects that have large unsold inventory last-mile financing is unlikely to solve the problem since the core issue is lack of demand. It is also due to the fact that at the time of starting the project, banks and financial institutions factored in much higher costs and are hence not able to sell below the cost, even though the market has witnessed a huge demand slump.

The expected outcome is that once the money comes to some projects it will “unclog” the financial system and act as a “lubricant”, indicating that once builders start delivering on some projects they will come out of the vicious cycle of lack of funding, leading to stalled projects which dry up future funding. It is also expected to clean up the books of the banks and financial institutions since the proposed fund will support projects written off by lenders and bad loans.

Given the cascading impact that real estate has on the economy, the relief measure is expected to lift the slowing economy and boost all allied sectors. As I write this, ratings agency Moody’s has cut India’s rating outlook to negative, on the back of a slowdown that is clearly turning out to be more protracted than what was earlier estimated.

While the government’s decision is very well intentioned, one needs to understand the scale at which the sector has been struggling and whether more is needed to move the needle.

Government expects 1,600 projects with close to 10 lakh flats to benefit. As per Anarock Consultants, 576,000 projects worth $63 billion could be running behind schedule across seven Indian cities. Several research reports indicate unsold inventory in India is to the tune of Rs 9.38 lakh crore, of which the highest is in the Rs 1-2 crore bracket where flats worth Rs 1.8 lakh crore are lying unsold.

While this is a very good start, to get rid of the “ghost buildings” India will have to do a lot more.

Gaurie Dwivedi is a senior journalist covering economy, policy and politics.


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