In what seems to be a course correction, more than a month after announcing an unpopular real estate relief package, the government has come up with a funding plan that may give respite to lakhs of homebuyers stuck in stalled projects. The government’s proposed alternative investment fund (AIF), worth 25,000 crore, is expected to provide last-mile funding to stalled projects across the country. According to the government, there are about 1,600 stalled housing projects, consisting of about 458,000 units, across the country.

The move may also revive buyers’ confidence in the real estate market. Last quarter’s real estate reports from several consultants revealed a significant drop in housing sales (Read more here). Experts believe that once the proposed AIF starts disbursing funds, construction in stalled projects will resume, which will boost confidence. “Many viable real estate projects were stuck due to the liquidity crunch, lesser sales, customers not buying under-construction properties. This step will also lift sentiments and help builders get more and more prospective buyers," said Pavan Gupta, CEO, Muthoot Housing Finance Company, a subsidiary of Muthoot Fincorp that primarily lends to affordable housing needs.

We tell you the projects that are eligible for funding under the government’s AIF, what AIF is, how it works and how it will benefit homebuyers of stalled projects.

Eligible projects

The government’s relief package announced in September promised to benefit only a handful of aggrieved buyers as it was only meant for projects in the affordable and middle-income categories that had not been declared as non-performing assets (NPAs) and did not have a pending case of insolvency against them in the National Company Law Tribunal (NCLT).

Experts believe that once the proposed AIF starts disbursing funds, construction in stalled projects will resume, which will boost confidence.
Experts believe that once the proposed AIF starts disbursing funds, construction in stalled projects will resume, which will boost confidence.

The current announcement removes the caveats, besides bringing in clarity on size and price of units that will get benefited—housing unit not exceeding 200 sq. m (carpet area) and city-wise pricing cap of up to 2 crore, and is, therefore, expected to cover and benefit a large number of stalled projects. “This will revive 80% of the stalled projects and will now cover all the projects irrespective of their stage of construction, whether there are cases in the NCLT or are declared as NPAs. Only those already in the liquidation phase are excluded," said Deo Shankar Tripathi, managing director and chief executive officer, Aadhar Housing Finance that caters to the housing financing needs of low-income households.

This time around, the government has widened the scope of projects that are eligible for funding to include those that have been declared NPA and are undergoing insolvency proceedings under NCLT, but have not gone under liquidation. “It is a commendable move by the government as this will widen the scope and ultimately benefit the homebuyer," said Pradeep Aggarwal, founder and chairman, Signature Global, an NCR-based developer with maximum projects in affordable housing segment. However, there are a new set of conditions.

The projects need to be net worth positive to be able to avail the benefit. Net worth positive projects are those where the value of the receivables plus the value of the unsold inventory is greater than the completion cost and outstanding liabilities of the project. This basically means that only those projects where some amount of sales has happened, and money to be received from the homebuyers and the money that the projects will receive after selling the remaining units should be more than the cost of completing as well as the cost of funding the project. For example, take a 100 crore project, which has received part payment of 25 crore from homebuyers and the cost of completing the project is 60 crore. Suppose the construction is stalled due to the incapability of the developer to service the debt, and there is further liquidity crunch because the homebuyers stop payments due to stalled construction. Further sales in the project also come to a halt. Such a project is likely to benefit from the proposed AIF as the project has a positive net-worth of 40 crore ( 100 crore - 60 crore).

To avail the benefit, projects need to be registered under the Real Estate (Regulation and Development) Act (RERA), 2016. Under the Act, every under-construction and upcoming project meeting certain conditions needs to get registered with the Rera of the respective state. According to the ministry of housing and urban affairs, as on 1 November 2019, 46,198 projects are registered under Rera across the country, with Maharashtra having the highest number of registered projects (22,755).

Though the government has not put any criteria on the level of construction that should be completed, preference will be given to projects where the construction can be completed quickly and where a large number of homebuyers are expected to benefit.

Though all affordable and mid-income projects registered under Rera are eligible for the benefit, provided they fulfil certain conditions, the government has set a value as well as the size limit for the projects.

The size of the houses shouldn’t be more than 200 sq. m (approximately 2,000 sq. ft) in terms of carpet area. Also, the cost of a single unit can be up to 2 crore in the Mumbai Metropolitan Region (MMR), 1.5 crore in the National Capital Region, Chennai, Kolkata, Hyderabad, Bengaluru and Ahmedabad, and up to 1 crore in other cities. The price doesn’t include any additional charges for amenities, parking, brokerage and registration and stamp duty charges. However, on a project level, a maximum finance limit of 400 crore has been placed. There will be caps on project as well as developer levels.

Manner of funding

SBICAP Ventures Ltd may be engaged as the investment manager for the first AIF. After assessing the financial position of various projects, the investment manager would provide funds enabling stalled projects to complete construction and deliver homes to buyers.

However, the fund will not get released to developers in one go. Instead, the allocated fund will get transferred in a special escrow account for that particular project and will be disbursed in accordance with the progress in construction. “Construction-linked funding will ensure that the project is completed within time," said Shubham Jain, senior vice-president and group head at ICRA, a credit rating agency.

According to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, there are various types of AIFs. The AIFs announced to provide last-mile funding to stalled housing projects will be set up as priority debt funds. Such AIFs do not undertake leverage or borrowing other than to meet day-to-day operational requirements. Funds such as real estate funds, private equity funds (PE funds) and funds for distressed assets are categorized under this.

According to the finance ministry, a special window is being structured as an AIF to pool investments from other government-related and private investors including public financial institutions, sovereign wealth funds, public and private banks, domestic pension and provident funds, global pension funds and other institutional investors and so on. The fund is, therefore, expected not only to support the sector but also generate commercial returns for its investors. The government will come up with a detailed investment policy based on which projects will be selected for financing.

It is definitely a big move and gives a ray of hope to homebuyers. However, how many projects will benefit will depend on how many of them are financially viable. The longer the project has been stuck, its cost will go up due to recurring interest in outstanding dues and rise in the cost of construction. Also, it will depend on how much more funding the government can get as 25,000 crore may not be enough, said experts. “As per our data, there are over 2,000 stressed projects with potential investment towards leftover construction cost requirements of 70,000 crore. This fund will be able to provide resolution to 30-40% of stressed projects," said Pankaj Kapoor, managing director, Liases Foras.

Once implementation under the scheme starts, aggrieved homebuyers would do well to keep an eye on their stalled projects.

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