₹25,000 crore realty rescue fund may fall short

The government’s ₹25,000 crore rescue fund for reviving the real estate industry may not be enough to address the full extent of the problem, even as private investors appear unwilling to take on outsized risks in the distressed sector without suitable returns.

With an estimated $25 billion worth of property projects facing insolvency proceedings in bankruptcy courts, there is little clarity on how many cases the proposed fund will be able to resolve.

“There is no legal provision of last-mile funding of projects under bankruptcy laws. The proposed alternative investment fund (AIF) would need to acquire the entire company or special purpose vehicle and not just projects under IBC (Insolvency and Bankruptcy Code),” a fund manager at an AIF, which specializes in distressed funding, said on condition of anonymity.

Several financial industry executives who spoke to Mint said the success of the government’s move to revive stalled housing projects will depend on how the rescue package is designed. On Wednesday, the Union cabinet approved a plan to set up the AIF to provide relief to distressed homebuyers and property developers. While the government will invest ₹10,000 crore in the fund, the remaining ₹15,000 crore will come from institutions such as State Bank of India, Life Insurance Corporation of India and private sector lenders.

The government plans to address projects that are net worth positive, which means the amount of money given for construction will be easily recoverable from the cash flows of the project, said Prashant Thakur, director and head of research at Anarock Property Consultants Pvt. Ltd.

“If the project is not cash positive, chances are that one may not be able to recover the money because the developer might have overborrowed. Given this criteria, it will be a small fraction of the entire NCLT projects that may benefit from this fund,” Thakur said.

The proposed AIF is aimed at bridging the funding gap in the real estate industry, with banks unwilling to lend to real estate projects fearing defaults as property developers have been struggling with dwindling sales, piling inventory and falling prices.

“Given the record pile-up of unsold inventory in the residential sector, not many are willing to underwrite the construction risk,” said a second fund manager of a foreign real estate-focused AIF. “While the saleability of a project goes up manifold once it is completed, poor demand conditions in the market may offset any potential upside that a private investor may be looking to make from these projects.”

“Also, it is fair to assume that the AIF will be inundated with funding requests from day one and how it evaluates and decides on potential recipients will be critical,” said the fund manager.

Another hurdle for the plan is that the AIF would need to acquire the entire insolvent unit under bankruptcy resolution, said Ramakant Rai, partner at law firm Trilegal. “If it is just a financier, then it does not solve the matter much as currently the market needs liquidity as well as good developers to tackle the real estate mess.” Rai added that the majority of cases undergoing bankruptcy proceedings will not be net worth positive, reducing the number of projects that can be revived.