The Government of India on 6/11/19, Wednesday brought relief to home-buyers with its announcement of a bailout fund of 25000 crores for stalled housing projects in the affordable and middle-income housing segment across the country.
As part of the measure, the government will pump in Rs 10,000 crore into an Alternative Investment Fund (AIF) and the State Bank of India (SBI) and Life Insurance Corporation (LIC) will contribute Rs 15,000 crore to the fund.
The announcement has brought diverse reactions from the stalwarts of the industry. Let's find out what the leaders are saying about the 25000 crore funding.
The Fund Might Aggravate Demand-Supply Imbalance, believes India Ratings and Research (Fitch Group).
India Ratings and Research (Fitch Group) believes that with stalled projects coming on stream, the demand-supply imbalance is likely to worsen, and if overall housing demand does not witness a recovery, pricing pressure in the sector is likely to be exacerbated. Furthermore, market consolidation in favour of Grade I players might also become protracted as supply from non-Grade I players come on stream. Under India Ratings and Research (Fitch Group) classification, Grade-I builders are those who have a reputed brand name, significant market share, strong execution capabilities, robust balance sheet with high financial flexibility, and are regulatory compliant.
Change in Eligibility Criteria to Help Distressed Projects: The new guidelines have widened the scope for projects that could avail funding under this special window. It will now include housing units up to a ticket size of INR20 million (Mumbai – INR20 million, other top seven cities- INR15 million, and balance cities - INR10 million) and projects that have been classified as NPA or are under National Company Law Tribunal (NCLT) proceedings, subject to them being net worth positive (cash flows higher than the project cost). Unlike the earlier announcement in September 2019, wherein the funding was restricted to non-NPA and non-NCLT projects only, the new measure would aid projects that are fundamentally viable but have been struggling due to slow sales and/or lack of credit availability.
Price Recovery and Market Consolidation to be Delayed: The residential real estate sector has already been facing high inventory, with quarter to sale (QTS) inventory of 9-24 quarters in the top six cities as of June 2019 compared to QTS of 16-23 quarters as of end CY16 (Source: Liases Foras). Due to funding constraints and regulatory changes, supply addition has come down on an absolute basis since 2016, while demand/absorption has remained broadly stable, thereby restoring some supply-demand balance over the last two years. While the announced scheme will result in the supply of habitable inventory, it would not have any direct impact on the demand. This may distort the ongoing consolidation/ correction in the real estate market, and result in further pricing pressure. According to Ind-Ra, a fund of this size would have the ability to bring about 300 million square feet (ft) on stream over the next two-to-three years, assuming last-mile funding of 30% for projects with an average construction cost of INR2,500 per square feet. Furthermore, the agency believes that this supply will primarily be witnessed in the Mumbai Metropolitan Region (MMR) and National Capital Region ((NCR) markets, which have a fairly high number of stalled projects. At end-1QFY20, the top six markets had sold 69 million sf (MMR and NCR jointly accounted for about 46%) and had about 10 billion sf of unsold inventory (MMR and NCR together accounted for about 54%).
Different people have different opinions about the announcement, however, we feel, all-in-all the move will bring smiles to many home-buyers' faces.