Government’s revamped stress fund for real estate a welcome move, but glitches remain

India’s residential real estate sector has seen some extremely challenging times in the past few years, due to liquidity-related issues and lack of demand in a slowing economy. The result: it is today among the poster boys of what’s wrong with the economy.

No wonder it has received a significant part of the government’s attention in trying to find fixes that remove bottlenecks to get new projects and sales going. With the Centre deciding to open a special funding window of Rs 25,000 crore for stuck projects, the chances of things getting back to normal are now high. The move is likely to help as many as 4.59 lakh housing units across 1,600 housing projects see completion.

Builders will still have to address mistrust among buyers, caused by project delays and solvency issues — a big reason why buyers turned passive. Developers have during this time had to contend with a pressure-cooker like situation as funding became tight, sales fell and inventories piled up. The fact that Indian builders’ annual payout towards loan repayment is twice as much as their annual earning is quite indicative of their plight.

Now the stress fund offers a welcome lease of life.

The modification in the initial plan that was announced in mid-September will ensure that more projects, including those, which have been declared non-performing assets or are pending at the NCLT, can reap the benefits of the alternative investment fund. The fact that the benefits of various government programmes have started to reach the common man gives us further reason to believe that things might start looking up in due course.

The RBI has been liberal with rate reductions this year, bringing the repo rate down to 5.15% through consecutive cuts. Banks on their part started announcing rate reductions in the beginning of October, at the onset of the festive season. In addition, the Centre has in this year’s Budget increased the tax deduction limit on housing loan interest component to Rs 3.50 lakh per annum from the earlier Rs 2 lakh, for housing units priced below Rs 45 lakh. Considering that more than half the inventory stock in India comprise affordable housing units, sales numbers could improve in the coming quarters.

Still, the new program leaves industry players and homebuyers begging for answers. Projects that aren’t covered by the Rules under the Real Estate Act (RERA) are ineligible for funding through this window and so are projects whose cases have reached the High Courts or the Supreme Court. It is flawed to the extent that some states like West Bengal haven’t adopted RERA, instead choosing to enact their own state law, while a few other states have allowed ongoing projects to be out of the purview of RERA. This immediately excludes from the new funding scheme, hundreds of projects, which ironically need it the most.

Builders and developers need a wider window to survive in an economy where home sales saw a 25% decline in nine prime residential markets in the July-September quarter of FY20 when compared to the same period a year ago, while new launches fell 45%. The only saving grace during the quarter was a 13-per-cent decline in inventory stock, primarily due to the reduction in new launches. As of September this year, builders in India’s top nine markets had an unsold stock consisting of over 7.78 lakh units.

Examples abound of reformatory measures launched by the government in the recent past to improve the health of the sector — launch of the real estate law, the goods and services tax regime and the ban on high-value currency notes ─ but they have adversely impacted short-term growth, notwithstanding the obvious long-term benefits.

The fact that prices have largely remained unchanged in major markets is not helping either. Data available with us show that in a majority of the markets, property values have remained flat, if not gone up slightly. If buyers were expecting a major correction in rates because of the ongoing slowdown, they have been left disappointed.

Dispute and insolvency resolution remains an area of concern. In several insolvency cases, buyers are still waiting for a clear resolution despite the country’s apex court hearing these cases. The same is true of various cases lying in the insolvency court. Speedier resolution would certainly send out a positive signal to consumers.

(By Dhruv Agarwala, Group CEO, Elara Technologies, that owns PropTiger.com, Housing.com and Makaan.com)

Source: Financial Express