The reality of real estate financing

Over these few years, as affordability declined, home sales followed suit. Project delays and lack of regulation led to erosion of buyer confidence. In previous years, buyers thought of not one, but more houses as safe havens for capital appreciation – as should be clear now, this is no longer the case.

Regulations such as RERA, GST and the Amendment in Benami Transactions Act which sought to correct the anomalies in the sector, helped restore buyer confidence too. However, they also caused some disruptions to the operational and financial stability of some players. The changes encouraged financial discipline and ushered in greater accountability and transparency. People who lacked the required discipline had to resort to high yield refinance to get things in order. As buyers exercised their right to opt out of projects which developers had delayed, recovery – especially with high coupon debt became more challenging. With the NBFC crisis, another reliable source of funds dried up.

All this combined has made funds for investment in real estate scarcer. Land was often considered the only raw material for real estate growth. But as things have progressed, capital is proving why it is one of the only two basic factors of production (the other being labour).

When dealing with a sector as large and important as real estate – no single player can move the needle. The entire ecosystem needs to take the onus of financing recovery on itself. The government is doing its part and has already announced a host of measures to put the economy as well the real estate sector back on track.

Recently, it announced a Rs 20,000 crore fund to help developers complete projects stalled due to last mile cash shortage. Since RERA has already helped restore buyer confidence, we have seen home sales recovering since 2018. A look at the top seven cities reveals housing sales are up from 96,358 in 2017 to 136, 518 in 2018, a growth of 41 per cent. In H1 2019, residential real estate stood at 78,427, a Y-o-Y growth of 22 per cent.

The government has also provided relief to NBFCs by infusing an additional Rs 10,000 crore in NBFCs. If developers focus on incentivising sales by passing on the recent tax benefit, then sales could go up even further.

Projects and developers which have shown consistent improvement need to be given additional time to repay debt or restructure their loans. Further, funding from government fund could help. This will help revive construction of projects and faster delivery. Projects of developers who are not financially viable need to be taken over by NBFC and transferred to other developers. Other players need to invest in the recovery as well.

There is enough interest from international PE fund for this distressed equity, if NBFCs and HFCs are willing to take a haircut on their loans. New sources of capital could come from distressed asset funds and private equity funds. The industry may not mentally be ready for distressed investing, but if some such deals happen in the future, it could pave the way for recovery. PE firms and distressed funds are, after all, meant to be premium sources of capital. When they make investments at the right numbers, it signals confidence in the system.