Three hurdles for the realty fund

Following up on its announcement in September, the government has come up with an alternative investment fund (AIF) of Rs 25,000 crore for stalled realty projects. This has immediately boosted sentiment and will unlock liquidity for projects where 60-70 per cent work has been completed. The scope is wide: It goes beyond the affordable segment to include units with a ticket size up to Rs 1-2 crore and will inject money where it is needed the most — bad real estate loans or those under resolution. If it works, this scheme will help homebuyers, real estate developers, and financiers. According to market sources, this funding will help 1,500 projects, making around half the stalled projects marketable over the next three years.

 
This scheme is a mini-version of the Troubled Asset Relief Program (TARP), which was created by the US government in early October 2008, to prevent a collapse of the financial system brought about by the financial crisis in the same year. Under TARP, the US Treasury stepped in to buy mortgage-backed securities and stocks of commercial and investment banks. TARP ran from 2008 to 2010 and was a financial success, earning a surplus for the Treasury.
 
In the process, TARP offered a lifeline to the same reckless and buccaneering financiers responsible for causing the crisis in the first place and therefore missed a chance to reform the system from its core. Similarly, in India, while the real estate fund is desirable, the question is: Will this let reckless finance companies and obdurate real estate developers off the hook? In any case, the effectiveness of the fund will depend on several factors.

 

1. Does the AIF, the saviour, get paid first? An extensive, 37-point FAQ put out by the government does not answer this crucial question. Put yourself in the AIF’s shoes. The first thing you would want to know is whether you will get preferential access to cash inflows. After all, the AIF is coming in to save projects the promoters and lenders have made a mess of. Indeed, there are cases where a project is completed 80-90 per cent and is ripe for short-term private deals, like the AIF would do. But in each of those cases, the potential investor asks: “Since I am helping complete the project, which is otherwise stuck, it is only fair that I am allowed to take my money out first.” The lenders cannot agree to this. The AIF will be in the same situation. If there is no clarity on this, no private institution will invest in the AIF and the government will have to arm-twist various government agencies to do so, eventually leading to a drain of public funds.

There are other issues. The AIF will be a debt fund. What kind of interest rate will it charge? What will be the rights of the fund, alongside bankers and finance companies, which are finding it hard to recover their money? Remember the investment is in stalled projects, on which interest is mounting; many are already bad loans or nearly so, and will soon land up in the National Company Law Tribunal. The FAQ is not clear on any of this, especially the AIF’s rights vis-a-vis other lenders.
 
2. What about the promoter? It is being assumed that money alone is a solution to all stuck projects. In a few cases it is. But in most cases, it is promoter quality that is responsible: Poor planning, overambitious projects, diversion of funds, and no desire to slash prices. The FAQ says the AIF “shall ensure that the end use of funds is only for the purpose of completing the project”, but what is the role of promoters in this? Project completion is only half the job; the completed units have to find buyers. Surely the fund cannot do that. Will the promoter continue to set prices and handle the selling process? But promoters’ reluctance to make price cuts led to the problem in the first place. The FAQ says “as part of the investment review, the Investment Manager will take a call if there is any need to change the developer for the project”. This is key, but will they do it?

 
3. Demand issue: Assume that the stalled projects are completed and moved to the market, what happens next? There is already an oversupply, as against weak demand growth. Here is the depressing math. According to real estate agents, India sells around 250,000 units a year in eight key cities: Mumbai, the National Capital Region, Bengaluru, Chennai, Hyderabad, Ahmedabad, Pune, and Kolkata. Sales are rising marginally (maybe around 5 per cent) in these areas. This demand is already over supplied by on-going projects; in fact, new launches (20 per cent growth) far outstrip actual sales. Even if 1.5 million units of the stalled projects come to this market, who will buy them? It will take years for this supply to get absorbed.

 
Perhaps the government should have tried other measures along with this fund. One, incentivise buyers with interest subvention on completed projects. Two, encourage mergers and acquisitions by supporting the many strong developers that can act in tandem with bankers to take over stalled projects. This is unavoidable to make the sector healthier. Three, use a carrot and stick policy with promoters to cut prices and boost demand. As with the overall economy, it is the demand side that needs to be worked on more than the supply side.
 
The writer is the editor of www.moneylife,in
 
Twitter: @Moneylifers