For asset reconstruction companies (ARCs), the cumulative recovery rate1 of security receipts2 (SRs) issued towards stressed real estate projects will increase by 16 percentage points to 38% this fiscal. The improvement will ride on robust sales of new units in these projects, backed by steady demand in the residential real estate sector, on the back of strategic debt restructuring facilitated by the ARCs.
A Crisil Ratings analysis of ~70 stressed real estate projects located in NCR, MMR3 and Bangalore micro-markets, with SRs issued worth ~Rs 10,800 crore, indicates as much.
Majority of these projects were trapped in a spiralling debt cycle due to falling sales, slow collections and lack of funds to complete construction — most of which are addressed today. Increase in real estate prices and rising demand in the above micro-markets post-pandemic resulting in ramping up of sales have turned these projects viable for funding by external investors.
Demand growth of 7-9% expected in fiscal 2026 for residential real estate in the three micro-markets mentioned above will support the sales for these stressed projects as well. About two-thirds of the rated projects are in the mid-premium segment4 and above, which are expected to contribute up to 80% of recovery for ARCs driven by stable demand in fiscal 2026. The remaining projects are in the affordable segment which is likely to see modest demand and will contribute lower to recoveries (see chart 1 in annexure) this fiscal.
Says Mohit Makhija, Senior Director, Crisil Ratings, “Overall, ARCs are expected to see recoveries in stressed real estate projects surge as developers aim to add ~2.5 million square feet of inventory this fiscal. With ~40% of rated projects nearing completion, there is renewed investor interest in at least one-fourth of these projects for last-mile funding, particularly in the premium segment. Incentivising sales at marginally below market prices of near-completion inventory is expected to accelerate sales in these projects.”
Restructuring of debt has emerged as the preferred resolution strategy for stressed real estate projects for two reasons. One, ARCs can bring down the debt to sustainable levels with an initial moratorium on payments, allowing developers to redirect project cash flow towards construction of units in these projects.
And two, restructuring is also favoured by ARCs due to inherent issues in the real estate sector such as two-fold ownership of land and development rights, multiple special purpose vehicle structures with cross-collateralisation and several layers of approval from state authorities.
While restructuring ensures promoters have skin in the game and resolutions are faster, the aforementioned issues make other strategies such as the Insolvency & Bankruptcy Code (IBC), enforcement and liquidation more time-consuming and thus leading to lower recovery.
About 40% of the stressed real estate projects in the Crisil Ratings SR portfolio has undergone restructuring as the primary mode of resolution, resulting in expected nominal recoveries of up to the full principal amount of debt acquired over an 8- year trust life (see chart 2 in annexure).
Says Sushant Sarode, Director, Crisil Ratings, “Debt restructuring of stressed projects has significantly improved the viability of projects by right-sizing debt to sustainable levels. Construction progress for the stalled projects rated by us is estimated at 80-85% on average within 2.5 years of restructuring. This construction is largely funded by project cash flow, thereby indicating strong sales velocity. The right balance of sustainable debt and steady demand momentum will help fructify efforts of ARCs to turn around some of these stressed projects.”
