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Explained: Will govt’s Rs 25,000 crore boost help revive ailing real estate sector?
Indiatoday.in  |  November 8, 2019

Koustav Das New Delhi

The government on Wednesday announced a much-needed bailout fund for stalled real estate or housing projects across the country. The move has been cheered by the ailing real estate sector, which has been struggling with projects due to an acute crunch in liquidity.

 

Finance Minister Nirmala Sitharaman announced the same after Cabinet gave its nod to provide priority debt financing for completion of stalled projects in the affordable and middle-income housing segment.

 

As part of the approved measure, the government will pump in Rs 10,000 crore into an Alternative Investment Fund (AIF). Meanwhile, the State Bank of India (SBI) and Life Insurance Corporation (LIC) will contribute Rs 15,000 crore to the fund.

 

CRITICALLY IMPORTANT MOVE

 

Experts say that approval of the fresh emergency fund for the real estate sector is "critically important" as it will not only help real estate developers but scores of homebuyers who are awaiting completion of their homes.

 

Anuj Puri, Chairman - ANAROCK Property Consultants, said, "This is a critically important move which eliminates the ambiguity which surrounded the timelines for setting up the fund, and its actual implementation. Finally, countless aggrieved homebuyers will see the light at the end of the tunnel."

 

He added that the move "could not have come at a better time" as a delay in setting up of the stress fund for the sector was causing serious apprehensions.

 

"The delay in the on-ground deployment of the stress fund gave rise to severe apprehensions about the main issues - of stuck and delayed projects - that had remained unaddressed so far. The timeline for setting up this fund and its actual implementation is quite critical," Puri said.

 

Puri further said several projects, stalled due to bankruptcy proceedings against the builder, will also be eligible to receive funds, provided they are not referred for liquidation already.

 

INDIA'S AILING REAL ESTATE SECTOR

 

According to data provided by ANAROCK, a total of 5.76 lakh units launched in 2013 or before across budget project segments are stuck in various stages of non-completion in the top seven cities in the country.

 

At present, total stalled budget projects in the Mumbai Metropolitan Region (MMR) and the National Capital Region (NCR) are the highest with at least 4,00,000 units (2,10,000 in MMR and 2,00,000 in NCR) pending completion. In monetary terms, the approximate value of projects running behind schedule in MMR and NCR adds up to Rs 3,60,000 crore.

 

While a Rs 25,000 crore fund is a small fraction of Rs 4,64,300 crore worth unfinished realty projects in seven top cities, other sovereign and pension funds have also agreed to invest in the emergency fund in due course to pull the real estate sector out of a crisis.

 

India's real estate sector, which started showing signs of weakness from early 2017 after demonetisation, was affected severely again in 2018 after infrastructure major IL&FS defaulted on loan payments, crippling non-banking financial companies or the NBFC sector including housing finance companies (HFC).

 

It is worth mentioning that NBFC's are a key source of funding for realty projects in the country. The liquidity crunch due to the collapse of IL&FS had a devastating effect on the real estate sector as builders lacked the capital to complete stalled projects.

 

Matters became worse in 2009 for players in the real estate sector as a contraction in demand left many lenders struggling to repay existing loans to NBFCs and HFCs.

 

BUILDERS IN PERIL

 

A Fitch Rating's Indian Division report revealed that the real estate sector would be required to repay loans worth $10 billion or over Rs 71,000 crore in the first half of 2020. It said default in repayment could affect mainstream banks as well.

 

Bankruptcy among real estate developers have doubled over the past year, adding to the woes of NBFCs - another interesting fact that doubles up as evidence pointing at a real estate crisis.

 

Experts said the real estate crisis, if not addressed in time, could have a contagion effect on NBFCs and banks.

 

Data from the Insolvency and Bankruptcy Board of India shows that a large number of realtors are under the insolvency resolution process, indicating that most of these builders may miss the deadline for crucial repayment of dues.

 

Meanwhile, another report by real estate research and analytics firm PropTiger said homes sales declined by almost 11 per cent in the first half of 2019-20, indicating that there has been no improvement in the real estate business.

 

This is largely due to a 47 per cent year-on-year (Y-o-Y) slump in new projects launched, triggered by a severe lack of liquidity among builders.

 

ROAD AHEAD

 

The government has hit the bullseye by setting up the stress fund but it needs to introduce more reforms in taxation for the revival of the ailing sector.

 

Speaking to business news channel CNBC, SBI Chairman Rajnish Kumar said recently that the sector needs urgent help. He said there is a need to increase affordability to boost demand in the real estate market.

 

Kumar explained that the taxation structure for the real estate industry is not ideal and it could perform better if taxation is streamlined. Real estate developers have to pay various forms of taxes including stamp duty and GST.

 

Homebuyers should note that stamp duty is the one-time charge paid under Section 3 of the Indian Stamp Duty Act. Stamp duty charges on property registration in the country are significantly higher in comparison to other economies in the world.

 

Rajnish Kumar said some relief in taxation for the sector will lead to increased affordability - something that is necessary as India continues to resolve an internal demand slowdown.

 

Since the poor outlook of India's real estate is a result of many overlapping factors, experts said the government now has to focus on factors like high taxation, which has crippled builders all over the nation.