Rescuing the Indian Real Estate Sector

Is India a doorknob away from a falling realty sector?

While there are no clear signs of revival but the Indian government is taking measures to bring back the animal spirits in the economy. One such move is bailing or providing debt financing in the form of setting up an Alternative Investment Fund (AIF) worth Rs.25000 cr funded by Government and the agencies like LIC, SBI and pension funds.

Projects under consideration are stalled at various levels of completion in affordable and middle income housing category where the 60-70 per cent work has been completed totalling 5.76 lakh units across top seven cities in the country including the bad real estate loans or those under resolution.

Signs of weakness were seen in the Indian Real Estate Sector from early 2017 after demonetization and was severely affected again in 2018 after IL&Fs defaulted on loan payments crippling NBFCs- key source of funding to realty projects in the country.

This mini scheme resembles to the Troubled Asset Relief Program (TARP), created by US for 2008 financial crisis. As TARP offered a lifeline to the reckless financiers responsible for the US meltdown by buying the toxic Mortgaged-backed securities and stock of banks, ultimately ending as a financial success, similarly is the Indian bailout move for the real estate sector but still there are many unaddressed hurdles like: Who will get the preference for cash inflows, The AIF, the rescuer, or the lenders like banks? Will the promoter of the project continue to set prices and handle the selling process? If the millions of units come to this market, who will buy them?

So the government should put in more measures along with this fund to address other key issues. Also concerns loom over implementation- Projects should be identified in a careful manner to see the desired impact and financial due diligence by the investors of the projects having various dynamics with stakeholders, lenders, buyers should be taken care of.

Though a 25000 cr fund is a fraction of 464300 cr worth of unfinished realty projects, this move could not have come at a better time when the economy is shattering with home sales going down and a severe lack of liquidity among builders.

All things considered buyers will see the light once the process is actually effective and completed. This package is crucial for the overall economic sentiment as the real estate sector is closely connected to several other industries like finance, insurance, cement, etc and labour market as well and if not addressed in time could have contagion effect on NBFCs and banks.

Between the retrieval of the real estate sector and the broader retrieval of the economy this step of the government might prove to be an inflection point.

Thank You 

Regards

Abhinav Jain

Kautilya

IBS Mumbai