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Government’s real estate fund to benefit stalled projects : India Ratings

Says demand-supply imbalance likely to worsen

The Government’s decision to set up a fund of Rs 25,000 crore to provide priority debt financing for the completion of stalled housing projects will provide relief to home buyers awaiting possession of the property.

“However, 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,” according to India Ratings.

In addition, the fund would offer an alternate funding channel to net worth-positive projects that have been stalled because of operational liquidity/credit availability issues, and it would benefit some real estate-focused non-banking financial companies and housing finance companies by reviving viable projects that were classified as non-performing assets (NPAs).

Furthermore, market consolidation in favour of Grade I players might also become protracted as supply from non-Grade I players come on stream. Under Ind-Ra’s 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.

The new guidelines have widened the scope for projects that could avail funding under this special window.

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.

The residential real estate sector has already been facing high inventory. 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 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 on stream over the next two-to-three years, assuming last mile funding of 30 per cent for projects with an average construction cost of Rs 2,500 per square feet.

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 wherein 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%).

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