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Real estate distress fund: Developers may have to pay 9% interest  |  November 8, 2019

Goutam Das

The Union Cabinet, on Wednesday, approved the establishment of a distress fund to help developers complete unfinished residential real estate projects. The 'Special Window' fund will provide priority debt financing particularly for staled affordable and middle-Income housing - according to ANAROCK, about 5.76 lakh units, launched in 2013 or before, across budget segments, are stuck in various stages of non-completion in the top seven Indian cities.


How will the fund work and how would it make a return?


The government stated that it would act as the sponsor and the total commitment to be infused would be up to Rs 10,000 crore. The fund would also bag investments from institutions such as LIC and SBI, which would expand the corpus to Rs 25,000 crore. This fund would be set up as a Category-11 AIF (Alternate Investment Fund) debt fund registered with SEBI SBICAP Ventures Limited is expected to be the Investment Manager. The fund, therefore, is not a charity - money to developers got to come back.


Homebuyers will have to pay the balance amount due. Unsold apartments in a project will also get sold after it is completed. That is how the money will come back to the distress fund - and with interest.


"While the government is yet to give more clarity on the entire process for eligible developers to avail the requisite funds or set some timeline, developers can probably payback by the sale of the unsold units in the concerned properties when completed," Anuj Puri, Chairman of ANAROCK Property Consultants, said. "For instance, let's say a project comprising 500 units that avails government funds (after fulfilling all eligibility criteria) has already sold 400 units before while the remaining 100 were lying unsold. Once the project completes, these 100 units can be marketed and sold and the money thus received can be used to pay back. That said, the government is still in the process of giving more clarity," he added.


Niranjan Hiranandani, Managing Director of Hiranandani Group and National President of industry body NAREDCO, said that the rate of interest will be decided by the fund. "I think it would be about 7-9 per cent. If the money is recoverable, it is a positive net worth project. The fund will take the risk of the recovery," he said.  "SBI and LIC will get back its money with interest. However, if there is a loss, the government will bear that part," he held.


The distress fund is important considering that many projects under the National Company Law Tribunal (NCLT) have no way to raise money. The distress fund can now fund the construction activity of apartments not higher than Rs 2 crore in value. 


"Some of the projects are nearly ready. The National Buildings Construction Corporation (NBCC) has been appointed by the Supreme Court in some cases. The question was of funding. Projects in Noida and Greater Noida can start immediately," Hiranandani said. 


Completion of projects would bring relief to homebuyers, of course. It would also have a ripple effect on other industries, reeling under the impact of the economic slowdown. Cement, iron, and steel industries are expected to see a rise in demand, for instance.