Reviving housing

Investment will depend on how the AIF works

Taking forward Union Finance Minister Nirmala Sitharaman’s proposal, announced in September, to provide last-mile funding for stressed housing projects, the Union Cabinet on Wednesday approved setting up a Rs 25,000-crore alternative investment fund (AIF). According to the plan, the government will put Rs 10,000 crore in the fund, while State Bank of India (SBI) and Life Insurance Corporation (LIC) together will bring in another Rs 15,000 crore. The fund will be managed by SBICAP Ventures Ltd. As demanded by various stakeholders, the government has also included projects that have been declared non-performing assets and the ones going through the insolvency process at the National Company Law Tribunal (NCLT). According to official estimates, the fund will target 458,000 unfinished units in 1,600 stalled projects in different cities.

The government has done well to set up an AIF to support the sector instead of directly taking responsibility for completing these stressed projects. The new investment vehicle will have far greater regulatory flexibility than either SBI or LIC on their own would have had. On the face of it, the decision is expected to help in multiple ways. First, this will provide relief to homebuyers whose savings are stuck in these stalled projects, and many are forced to pay both the equated monthly instalments on their home loans and rent. Second, this would help start activity in the real estate sector, which is struggling because of the liquidity crunch and non-availability of funds. Since real estate is linked to several other sectors, it will help push up economic activity in general and benefit specific industries such as cement and steel, which have seen a sharp contraction in demand in recent months.

All this looks good on paper, but things are unlikely to be that straightforward. For instance, some analysts have noted that the fund may not be sufficient to make a meaningful difference on the ground. According to Jefferies, this may be able to fund only 16 per cent of the stalled projects, assuming a 50 per cent rate of completion. Others give a higher figure. The impact, to a large extent, will depend on how SBICAP deploys the fund. It is also not clear as to what kind of returns this fund would be expecting. Besides, the fund may face a fair bit of complexity in the case of real estate companies or projects that are undergoing the insolvency process, or are taken to the NCLT at a later stage. It will not help the cause if the fund gets trapped in legal hurdles and is not able to recover its investment. It is important to note that investment in such funds will depend on the experience of this initiative. If this fund is not able to show good returns, it will be another setback for the real estate sector.

At a broader level, the sector is facing multiple issues. Apart from a liquidity crunch, softer demand because of slower economic growth has resulted in a massive build-up of inventory. This has also led to a significant price correction in various markets. According to one estimate, about 1.25 million housing units are lying unsold across the country. Therefore, at the macro level, the recovery in the real estate sector will depend on a broader recovery in the economy.