Last-mile lenders’ interest crucial for revival of stuck home projects

The Cabinet approval for the creation of a ₹25,000 crore alternative investment fund (AIF) to revive scores of stalled housing projects aims to bring back confidence in the beleaguered housing market.

However, as the adage goes, the devil is in the detail. The presence of myriad stakeholders in real estate projects and numerous legal, accounting and regulatory compliances pose a challenge to the quick resolution of stranded projects.

The first big challenge is to lure investors into the AIF pool, which would be structured as a debt fund. Indeed, the government has set the ball rolling with a ₹10,000 crore commitment. It also plans to rope in financial institutions such as State Bank of India and Life Insurance Corp. of India, along with private sector investors.

About 1,600 projects with about 480,000 dwellings are unfinished for want of funds, leaving all stakeholders in distress.

But will investors bite the bait? Why will they come as last-mile lenders at a time when the country’s housing market is in a shambles?

According to Anuj Puri, chairman, ANAROCK Property Consultants Pvt. Ltd, “The need of the hour is to prioritise and accord top priority status to these last-mile funds as the risk taken by them is significantly higher than others.”

It is important to protect the last-mile lenders’ interest. Although the government has indicated the same, it is yet to be clearly defined.

In fact, one can draw a parallel from the roads sector. A May 2015 Icra report explains that when the National Highways Authority of India was ready to fund distressed road assets, the existing lender was asked to furnish a no-objection certificate that NHAI would have the first charge on revenue stream (from annuities and tolls) after the project was completed.

Similarly, the stakes are high for last-mile lender who will step in to complete stuck projects. S. Sriniwasan, chief executive and managing director, Kotak Investment Advisors Ltd, says, “the cash flows are perpetual in manufacturing companies after the asset is revived. But, in real estate projects, the cash flow is finite and ceases after the asset (property) is transferred to the customer.” Hence, it is imperative to set the financial framework of the AIF soon.

Shubham Jain, group head and senior vice-president, corporate ratings, Icra Ltd, said, “The return expectations of private investors would need to be factored into the investment policy, which may result in some narrowing of the eligible project pool.”

The report estimates that about ₹35,000-45,000 crore would be required to fund the completion of the revised quantum of 458,000 eligible dwelling units. Then, there is a legal framework that investors feel are detrimental to their interest. For example, a single home buyer or a vendor in a project can drag the project/developer to court and file for insolvency under the Insolvency & Bankruptcy Code (IBC). Once invoked, the IBC overrides all other contracts, and projects that are re-started can again come to a standstill. Industry experts feel that in the recent past, the angst of home buyers has often led to misuse of legal protection.

That said, expanding the size and scope of the fund has gone down well with the industry. “Higher price level of residential units (example: up to ₹2 crore in Mumbai and ₹1.5 crore in cities such as Pune) that are not eligible for funding shows that the government recognises the need to support stuck projects in the affordable and upper-middle-class segment,” says Samantak Das, chief economist and head of research and REIS, JLL India.

Further, projects that are under the National Company Law Tribunal (NCLT) or are classified non-performing assets are also eligible, provided their networth is positive. In this context, the onus of evaluating the project will be on the governing committee. “Most stuck projects in real estate are special purpose vehicles (SPVs) with thin capital structures, hence it is unlikely that they have positive net worth,” says Sriniwasan. Unfortunately, in many cases, developers may have even siphoned off funds from the SPVs.

That’s not all. There could be hurdles on closing these projects and evaluating cash flows on account of unsold inventory. “Demand risk for the unsold inventory is exacerbated by the macroeconomic weakness. The incremental sale generation from the funded projects will be another key look-out area, especially given the dependence of final recovery of debt obligations on the same,” explains Jain.

Be that as it may, the initiative, if implemented soon with stakeholder concerns addressed, can indirectly help kickstart the moribund residential sector.