Even Before Covid-19, Stressed Projects Struggled To Get Help From Real Estate Rescue Fund
Even as the real estate industry in India hopes for bigger relief measures following a nationwide lockdown to contain the coronavirus pandemic, a rescue fund set up for the sector last year is yet to disburse money for select stressed projects.
The government-led alternative investment fund, with a starting corpus of Rs 10,000 crore, is yet to release money to stressed projects though the amount sanctioned to such projects may range between Rs 700 crore and Rs 1,000 crore, a senior industry executive told BloombergQuint on the condition of anonymity as the information is not public yet.
The fund, which was started seven months ago, may have given final approval to six distressed realty projects and there are as many as 31 projects that are at various stages of approvals, according to the firm managing the AIF’s corpus. But it is facing resistance from lenders who are unwilling to give a “no-objection certificate” to invest in the stressed projects unless they get a portion of the project cash flow.
“Between these projects, we would have provided the solution to 40,000 home units and approximately 20,000 home buyers who are stuck in these projects,” Irfan Kazi, chief investment officer at SBICAP Ventures Ltd., the government-appointed manager for the India AIF, said at a webinar organised by the National Real Estate Development Council.
The real estate sector has been facing a liquidity crunch following defaults by IL&FS Group in 2018, leading to a pile-up of unsold apartments. That, coupled with an economic slowdown, stalled a nascent recovery in the disruption caused by Prime Minister Narendra Modi’s cash ban and a stricter housing law. The fund was subsequently set up last year to bail out stressed projects.
According to government estimates, projects with about 4.58 lakh housing units that require Rs 55,000 crore were stalled. In November 2019, the Union Cabinet decided to set up a ‘special fund’ in the form of an AIF to provide priority debt financing for completing stalled housing projects. HDFC Ltd. and State Bank of India agreed to contribute to the fund.
BloombergQuint reported in February that the fund has started disbursing money for stressed projects in Mumbai and Bengaluru. It released part of the sanctioned Rs 160 crore for Cable Corporation of India’s project in Borivali East in suburban Mumbai, after Indiabulls Housing Finance Ltd., the project’s primary lender, gave a no-objection certificate. But such luck has so far evaded the other 31 pre-approved projects to be backed by the fund.
Still, according to a senior industry executive, that’s an exception. The fund is facing challenges in disbursing the money to projects led by difficulty in getting the no-objection certificate from primary lenders, the person said on the condition of anonymity. The lenders, the executive said, are unwilling to give NOC for projects where significant cash flow is expected unless they get a portion of it.
The fund’s norms, however, do not allow such upfront sharing of cash flows. According to the AIF’s guidelines:
- The fund gets a senior charge and 100 percent cash flow till it recovers its returns before cash can be shared with the lender.
- AIF targets an internal rate of return of 15 percent per annum from these investments.
Kazi, answering a query on lenders’ reluctance to wait for three to four years to get their money, said, “The fund was never set up to simply repay the underlying lenders. Just by re-paying the underlying lenders the project is still not going to get completed. Our mandate is to complete construction.”
He, however, said the fund “can share anywhere between 0 and 25 percent”. “But it depends on the numbers that flow into every deal. There is no hard-and-fast rule.”
According to the second executive cited earlier, the single biggest factor withholding the lenders from giving approvals is the lack of clarity from the Reserve Bank of India over one-time restructuring of loans for projects that are receiving funding through the AIF.
But NOC is not the only reason causing a delay. Out of the 31 deals, which are at various stages of due diligence, some are facing the problem of getting NOCs from the lenders, the second executive said. But six deals that have got the final approval and have the NOC are still awaiting other approvals and execution of documents before the AIF disburses money.