Just taking in account major real estate markets - Delhi-NCR, Mumbai Metropolitan Region (MMR), Kolkata, Chennai, Bengaluru, Hyderabad and Pune, have incomplete units worth more than Rs 4.48 Lakh Crore. The scenario gets bleaker when other Tier II and III cities across the country are counted. Special Window for Affordable and Mid Income Housing (SWAMIH) Investment Fund of Rs. 25,000 Crore was created in 2019 to provide last mile funding to projects which are net-worth positive and registered under RERA. The government has put in an additional Rs 5,000 crore into the SWAMIH Invest Fund-I to help the stressed realty investment platform achieve its final close at Rs 15,530 crore. SWAMIH I is managed by SBICAP Ventures, a unit of State Bank of India. SBI is also one of the fund’s anchor investors along with Life Insurance Corporation of India. Other investors are HDFC Ltd and major state-run banks.
With a target to complete over one lakh homes, the fund is presently appraising around 286 projects across more than 30 cities in India. The additional commitment will enable the Fund to continue to evaluate deals till December 2024.
REASONS FOR THE STALLED/DELAYED PROJECTS
There could be multiple internal and external variables that could potentially cause projects to get stalled/ delayed. As per Alok Jha - Vice President & Head – Research, ASK Property Fund, “One of the main causes of stalled / delayed projects are lack of liquidity and difficulties in obtaining additional working capital in case of slow absorption. Existing lenders have also been hesitant in providing additional working capital. Another major factors impacting project completions is unavailability of single window clearance. Developers have to seek multiple approvals which typically takes between one to two years. Projects could be delayed due to any of the approvals needed at various stages of a project lifecycle since there are numerous mandatory permissions for real estate projects that include commencement certificate, building layout approval, non-agriculture permission, several NOCs, environmental clearance wherever applicable, approval from water, electricity & fire fighting department, occupancy certificate, and many more.
Sometimes, unexpected policy shifts / NGT circulars, etc. are also responsible for delays. Post regulatory disruptions too may slow sales, impacting mid-sized builders with sizeable under-construction portfolios more than their larger peers primarily due to their limited ability to raise capital. Further, higher competition amongst themselves, prolonged litigations (e.g., buyers taking developers to NCLT), legacy of over-exposure, and external factors like construction ban due to pollution & environmental issues etc… have also affected developer’s ability to complete projects on time. The slow development of requisite infrastructure by approving/ development authority also adds to the delay in settlement and habitation.”
As per Nihar Thanawala, Director, Real Estate, MO Alternate Investment Advisors Private Limited, “Over the last decade, residential real estate has had a tumultuous ride which started with a phase of growth in both demand & supply in the initial few years from 2010 to 2013 as we emerged from the global financial crisis. Prices rose and demand reached a new peak during this period. As NBFCs loosened their purse strings, there was burst in liquidity which gradually led to new supply outstripping demand and eventually to prices stagnating across most cities. In late 2016, the country witnessed the landmark demonetization which was followed by a mix of regulatory reforms such as RERA & GST which set the sector on a path of organization and transformation like never before.
While smaller & unorganized developers struggled, organized & branded developers thrived. This period was followed by the IL&FS debacle in 2018 which created an immense liquidity crisis leaving several developers and projects in a state of disarray. This resulted in several projects being delayed and some being stalled indefinitely. This also led to a huge trust deficit in the sector leading to shrinking demand, rising inventory and reducing prices. The onset of the COVID-19 pandemic in 2020 turned out to be the final nail in the coffin for many and an opportunity for a few as the sector witnessed consolidation across the board.”
Amit Goenka, MD & CEO, Nisus Finance added, “The major hurdle currently facing the projects that have been stalled is the lack of capital available to these projects for completion. Several projects have got stuck due to issues faced by NBFCs like DHFL, Reliance Capital etc who themselves were subject to insolvency proceedings. Banks have not been allowed to takeover these NPA accounts and hence new liquidity to take over these loans and complete such projects is not available through regular financing channels. Several of these stalled projects have also been prior to the implementation of RERA wherein buyers’ monies were siphoned off rendering many projects unviable, specially with increased input costs and inventories sold at historic prices. Projects of developers who have themselves become insolvent have stopped new sales and further financing in ongoing projects due to market perception of risk, bringing even viable projects to a grinding halt. Lastly projects have also got stuck due to changes in regulatory norms like change in environmental and development rules at the local, state or national level.”
FUNDING OPTIONS FOR DISTRESSED PROJECTS
Any additional avenues of fund availability will help developers to complete projects on time and revitalize this segment (stalled / delayed projects). Developers are already benefiting from SWAMIH fund, a major driver in completing stuck projects.
Alok Jha added, “AIF is another major source of funding available for distressed / stuck projects. Apart from SWAMIH Funds, developers have funding alternatives predominantly from real estate private equity firms and NBFC’s. However, it has not been an easy journey in the last five years. Other options for providing indirect financing without exposing the project to debt or controlled debt and completing it include restructuring, joint ventures / acquisition of stalled projects, etc. The co-developer can also step in and bailout stalled/delayed projects to enable their completion.”
Nihar Thanawala shared his views, “Roughly a year after the IL&FS debacle, the SWAMIH fund was set up to fund and complete stalled housing projects and deliver homes to customers. Since then, several projects have been funded and a few completed. While RERA plays an instrumental role in providing the right framework to protect home buyers’ interests, government backed funds like SWAMIH provide capital, which is the lifeblood for stalled projects. An increase in similar government backed funds would certainly help the real estate sector. Apart from SWAMIH, special situations private equity and credit funds have played an active role in providing the required capital to distressed yet viable projects over the last 2 to 3 years. While this capital is priced on a more risk-adjusted basis unlike that of government backed funds, it has led to completion of several stalled projects over the last couple of years.”
Amit Goenka expressed, “The Insolvency and Bankruptcy Code, 2016, has not been able to resolve more than 5% of the cases where a financial crisis has crippled any project. The efforts of RERA are bearing limited results since it is a quasi-judicial body with limited recourse against all stakeholders. Several projects lack data updating and transparency and orders or RERA are regularly challenged at the appellate and higher judicial levels delaying and sometimes even defeating the entire resolution process. The focus of
RERA has been more focussed at getting justice for homebuyers whose money is stuck through sanctions against the developer. The scale of the problem is huge, with almost Rs. 2 Lakh crores worth of projects needed to be rescued. The current corpus of the government backed SWAMIH Fund has yet to be fully deployed even after three years of its commencement. Hence more government backed funds may not be the only solution to resolve these projects. A stronger judicial process or a fast-track court to resolve issues of stuck projects with higher weightage or rights been granted to government backed financial institutions who are willing to finance such projects will be most effective.
Viable projects can be financed through a change in developer wherein a large player bankrolls such distressed but viable project either through its balance sheet or along with its finance partner. Several asset resolution companies are also willing to take over distressed NPA projects from existing lenders and further capitalise their completion. Further it is also possible for promoters of such distressed projects to monetize their non-core assets and turn around stuck projects. Several global funds like Apollo, Varde, Oaktree and domestically funds like Nisus Finance have taken significant interest in special situations and employed several hundred crores to resolve distressed assets in conjunction with existing lenders. However, it is imperative for the existing lenders, promoters and homebuyers of such projects to allow new capital or lender or new developer to step in.”
BRINGING BETTER LIQUIDITY IN REAL ESTATE
Historically, direct real estate has been one of the most preferred asset classes for investment in India. It has also been one of the foremost sources of capital in Indian real estate. However, over the last few years, stabilization of prices, withdrawal of certain tax benefits and increase in transaction costs have made direct real estate a somewhat lacklustre investment.
As per Nihar Thanawala a reduction in interest rates and re-introduction of certain tax benefits (second home) could provide a further impetus to demand for direct real estate and bring significant capital into the sector.
Alok Jha shared that government's reforms and policies will assist the real estate industry and aid to alleviate the market's liquidity bottleneck. He added, “Other measures could be reduction in reverse repo rate, special loans for delayed real estate projects, relaxing norms for default, etc. This move will help ease funding pressure in the housing sector, make it easier for developers to get capital, ensure that stalled projects get finished, stabilize the housing market, and lower systemic risk.”
Amit Goenka suggests, "Constant tinkering with bankruptcy law or showing leniency to defaulting borrowers threatens the entire credit system. The solution must lie in attracting large scale foreign investment into the sector, with a highly regulated, transparent process, with a high degree of accountability at all levels supported by appropriate government apparatus. Litigation financing should be duly recognized in cash waterfall, so that affected stakeholders can approach the judicial process fairly. Wilful defaulters who have deliberately siphoned off public money from the projects should be severely punished and imprisoned and their assets liquidated to recover the missing money in the shortest time possible. The political will required for such tough measures is the key to the problem.”
ADDITIONAL ALLOCATION TO SWAMIH FUND AND EXTENDING THE PROTECTION AVAILABLE TO SWAMIH FUND TO OTHER LENDERS CAN REDUCE RISK WEIGHT OF LENDING FOR STUCK PROJECTS. FURTHERMORE, FOCUSING ON BRINGING INSTITUTIONAL FINANCE INTO THE NATION THROUGH A RELAXED ENTRY POLICY WILL ENHANCE THE CAPITAL FOR REAL ESTATE, WHICH WILL BENEFIT DEVELOPERS.
NO SINGLE BANK OR FINANCIAL INSTITUTION OR GOVERNMENT BACKED FUND LIKE SWAMIH, COULD POSSIBLY MANAGE THE PLETHORA OF ISSUES AND RESOLVE THE MAMMOTH TASK AT HAND. GIVEN THE DISBURSEMENT OF SWAMIH OVER THE LAST FOUR YEARS, IT WOULD SEEM THAT SEVERAL SUCH SWAMIH STYLED AIF FUNDS WILL BE NEEDED TO OVERCOME THE BACKLOG ASSUMING NO FRESH PROJECTS GET STALLED. AMIT GOENKA
WHILE THE LAST FEW YEARS HAVE SEEN A GRADUAL RISE IN INVESTMENTS FROM GLOBAL PRIVATE EQUITY, CREDIT AND SOVEREIGN FUNDS, CONTRIBUTION FROM DOMESTIC REAL ESTATE FUNDS HAS BEEN NEGLIGIBLE. BETTER REGULATORY FRAMEWORK & RESOLUTION MECHANISM COULD ATTRACT SIGNIFICANTLY MORE GLOBAL CAPITAL INTO INDIAN REAL ESTATE AND FAVOURABLE GUIDELINES AND TAX STRUCTURES COULD LEAD TO MORE DOMESTIC FUNDS BEING RAISED IN FUTURE.