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Govt’s Booster Dose for Beleaguered Real Estate Sector a Welcome Step But Not Nearly Enough

New Delhi: India’s slowing economic engine could stall further, with analysts predicting a sub-5% GDP growth in the second quarter (July-September), official figures for which are scheduled to be released later this month. This growth rate would again be a record low and worrisome enough for the government to think of more measures to help revive demand. Till now, Finance Minister Nirmala Sitharaman has announced some sector specific measures as well as some others to boost growth. But the economy continues to be in a deep slowdown due to global woes and collapse of domestic demand.

While the measures announced by the government so far to boost economic growth have been well received — such as the significant reduction in headline corporate tax rate — they are unlikely to show results in the near term.

In this backdrop, the latest announcement by Sitharaman about a fund to help stalled real estate projects is a welcome move since this may have a more immediate impact. She announced the establishment of a ‘Special Window’ fund for providing priority debt financing for completion of stalled housing projects that are in the affordable and middle-income segment.

Projects which will be eligible to get funding must be already net worth positive and in the affordable and middle income categories only. This means the ticket size of the units for Mumbai is capped at Rs 2 crore, at Rs 1.5 crore for other Tier-I cities and Rs 1 crore for all other cities.

The government itself has estimated that 1600 RERA-registered projects with 458,000 units are stalled for lack of funds and would benefit by the latest announcement.

Sitharaman said the government shall act as the sponsor of the Fund, committing up to Rs 10,000 crore. The fund will be set up as an Alternate Investment Fund (AIF), registered with SEBI and will be professionally run. It would provide relief to developers that require funding to complete a set of unfinished projects and ensure delivery of homes to buyers.

But here’s the catch: it may neither be an entirely new relief for the beleaguered real estate sector nor would it be nearly enough to revive all the stuck housing projects.

This time, all Sitharaman has done is tweak an earlier proposal made in September this year, to now allowed projects that have not already defaulted on loans and have been completed by 60%, to also have access to the fund being created for helping the real estate sector. The fund itself had been announced earlier, with a corpus of Rs 10,000 crore from the government and hopes of others pitching in to make it nearly Rs 25,000 crore.

In the September announcement, stressed projects that had either defaulted or had not been 60% complete had been kept out of the purview of the fund. At that time, analysts had pointed out that keeping stressed projects out of the ambit of the new fund would negate the very purpose of such a fund since projects which had not defaulted could anyway seek loans in the market.

Anyway, even the present relaxation in the category of stressed real estate projects which can use loans from the new fund does little to help the sector. Analysts at brokerage IIFL have noted that “we see significant challenges in its implementation, considering the complexities and multiplicity of stakeholder involvement. No direct impact on listed developers is foreseen”.

These analysts pointed out that the stuck projects with purely last-mile funding issues — which are not involved in litigation and have a positive net worth — only will benefit from the new fund.

Real estate analyst PropEquity has estimated that Rs 90,000 crore are required to finish stalled real estate projects: Of the total 458,000 units that are stuck, nearly 65% or two in three are in Mumbai and the Delhi NCR region. Further, tier-2 cities have nearly 60,000 stuck units. PropEquit has also estimated that nearly 60% of the stalled projects are sold out and that 40,000-60,000 units may immediately see some work recommence, post the announcement of the Special Window.

Another estimate pegs the number of stuck units at 576,000, much higher than what the government has acknowledged.

Analysts at another brokerage have said that though the announcement of the real estate fund is positive for the economy, the key thing to watch out for is how such funding is executed. One of the key economic challenges India faces at present is a steep slowdown in the real estate sector after demonetisation and other measures were adopted in the last two-three years. In the real estate sector, developers in the small to mid-size segment are sitting with projects which have been stuck due to lack of last mile financing.

The problem has become bigger due to the crisis in the non-banking finance companies (NBFC) sector, which is itself in a crisis following demonetisation and the subsequent squeeze in the economy.

So while there is reasonable hope that the fund announced by the government will help in some ways, it is unlikely to make a significant difference to the fortunes of the stressed real estate sector just yet.

(Author is a senior journalist. Views are personal)

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Source: News18