By Rohit Garodia, Managing Partner, Pecan Reams
There was a time a few years ago when money flowed into the real estate sector. However, over the past few years, the flow of capital has been albeit slow and largely towards refinancing existing loans of projects, and not much fresh capital is required for the project working capital needs.
Compared to what they were doing earlier, the traditional banking system, Non-Banking Financial Company’s (NBFCs), and Housing Finance Companies (HFCs) have been providing far slower money.
Part of the story dates back to when Banks were refrained from providing loans for land purchases. Post that PE Funds, NBFCs emerged as top choices for funding for many developers. The NBFCs have been facing headwinds since the IL&FS crisis of 2018 which was followed by the DHFL & Yes Bank crisis’ and have been facing a tough situation and are looking at ramping down their wholesale book besides not providing new money as well.
With NBFCs going through trouble, there are not too many who are providing capital to developers and those who are, are doing it only for a few players. The takeaway is that there is largely not much funding happening in the sector at all. Leaving growth aside, this is also impacting the projects which could have been completed. SWAMIH fund by Government has proven helpful here and has helped in many of the projects in a short duration of time.
No one knows where financing in real estate would go from here. This raises two sets of points or questions:
- What is the future of financing in real estate?
- Do we come up with a loan restructuring mechanism for the NBFCs?
Or a third, do we keep continuing with the current ways. That might not be quite the ideal option. It will be merely pushing out the problem & not solving it.
Among the main reasons for this liquidity crunch in the real estate sector are:
- Reduction in overall Sale Value since prices came down or stagnated last 4-5 years is most markets, hence profitability & security cover for the Lenders
- Larger loans given to projects thanks to ambitious Developers (Borrowers) & equally ambitious Lenders
- Post the DHFL crisis, NBFCs have faced increased borrowing costs at their end and have more than passed on these increased costs onto their Lenders. While the Borrowers took variable interest rate loans, the numbers of those projects did not allow for 2-4% p.a. increases as having happened in many cases.
- Frequent, refinancing/rejigging on loans to avoid NPAs, delayed payments, etc. which all bring in additional costs
Real estate is among the many sectors that have already reached out to the Government of India seeking a bailout package during the pandemic, as surviving without the looming threat of an NPA in the long term will be difficult.
If we are to look at the future of the real estate sector in the present state of the Indian economy, we will need to have a strategic approach when it comes to financing. Using long-term financial methods of borrowing and lending money can be beneficial to the sector.
Expanding the scope of the government’s decision to allow restructure the loans of real estate firms at the project level rather than developer-level beyond just the COVID-19 pandemic will benefit both homebuyers as well as real estate developers. A decision in this regard would help ease liquidity and enable construction to recommence in projects that have been stuck due to the flow of capital in the construction business.
The risk associated with each project should be separately evaluated by the lenders. A parent company cannot be held guilty for a subsidiary being a defaulter. In the absence of a practical approach towards loan restructuring mechanism for the NBFCs, there is a threat that all projects could turn into NPAs at some point.
This threat to the sector is real. And has not only been induced by the lockdown of 2020 or the second wave of COVID-19. Reduction of stamp duty, low interest on home loans, and benefits offered by the builders have undoubtedly helped the sector. But is it enough in the long run?
Threat is Real
The threat is of banking and financial institutions having either slowed down lending or completely stopped advances to real estate, as the sector too finds it difficult to make repayments. This has been the case even before the pandemic with growth in the real estate sector remaining sluggish.
Many builders are in a situation where projects have remained stuck due to the market slowing down and thus a mounting inventory of unsold units. This trend bucked slightly from December onward when the stamp duty was reduced. Between January and March developers sold 14,830 units in Mumbai, a 41% change between Q1 2020 and Q1 2021. But since the stamp duty, sops have gone the market has noticeably slowed.
The government and the Reserve Bank of India have initiated steps that benefit the sector, but these measures do not address the prolonged legacy problems. Backed by low-interest rates, stamp duty reductions, and sops by the builders did help sell some units, but what about the long-term. This is where the argument for restructuring of loans comes in.
Charting the Revival Path
There is a fear that distressed real estate could assume the status of a separate category if credit stress among developers continues to grow, as is expected. In the last 5 years there have been instances where developers did not gain from expected market trends of sale price increase, high volume sales, etc. and thus ended up in a cash-flow crisis.
Since receipts are lesser or worse than the payments one needs to make, money collected for a project gets used up for something else, and then crisis stings. A lot of time and effort – meant to be spent on the projects – is then spent on an exercise of raising financial resources, very often futile.
In 2020, the real estate sector was allowed to extend commercial real estate loans by one year if projects were delayed for reasons beyond the control of its promoters. This was not treated as restructuring of the loans, but the extension was a limited time offer, and thus its benefits also short-term.
For any long-term revival of the real estate market that truly extends benefits to developers and lenders alike, the industry needs a comprehensive revision of real estate policy. The government should in consultation with stakeholders focus on the restructuring of loans to tackle what has been a systemic legacy problem for the builder community.
Policy Changes
Today, they find it difficult to raise money or even carry out asset monetization. Offering the sector, a long road to loan repayment is necessary. Bringing in a revised restructuring policy for the real estate market that focuses on stressed projects or those that are slow on sales is a solution that needs to be explored.
The outcome should not only be providing developers with a bailout alone but a means of ensuring project completion for the builder, cleaning up of books for the lenders and homes for the buyers. Restructuring loans systematically, on a case-to-case basis will go a long way in ensuring that cash flows improve in a liquidity-strapped situation by offering a cushioning effect to the precarious financial condition, tanking sales, and project completion delays – all that is needed to prevent an NPA tag.
