Realty project revival set to get a boost
With the Kamath panel making debt restructuring mandatory at the project level rather than the parent company level, project revival could get a boost. This will help resurrect stalled projects faster, say real estate developers and experts.
“The panel has separated debt from the main company and is considering project viability. My fear is that most real estate projects have more loan to value (of the asset) that they can sustain. So, someone will have to take a haircut,” said Vikas Oberoi, chairman of Oberoi Realty.
Real estate companies usually form separate special purpose vehicles (SPVS) for each project as subsidiaries of the parent. And, some of the projects may get good response due to location and other factors.
According to the scheme, the Reserve Bank of India’s (RBI’S) special resolution window would enable lenders to provide one-time restructuring of loans based on the prescribed framework pertaining to the Covid-19impacted assets.
“This is expected to benefit real estate developers, including suppliers of key raw materials, to reset their debt and provide a fresh lease of life to service their debt prudently. Also, this will enable corporates to focus on restarting their businesses in the next normal with renewed vigour and vitality. Lower interest rates, combined with this accommodative stance of the central bank, will aid in rebuilding consumer sentiment, thus consumption (including housing sales),” said Ramesh Nair, chief executive officer (CEO) and country head (India), JLL.
The RBI sought to strengthen the inter-creditor agreement (ICA) mechanism by clarifying that the ICA is mandatory. Compliance of the ICA signing will be assessed as part of its supervisory review.
“This should encourage signing of the ICA and preparation of resolution plans. The requirement for maintenance of escrow accounts will also aid monitoring and control,” said L Viswanathan, partner, Cyril
Amarchand Mangaldas.
With this, sales of a particular project will be retained in an escrow account and will be used to repay loans. The real estate sector is going through a crisis. Sales fell 81 per cent in top Indian cities in the June quarter and there were no new launches. In the office space segment, the top metros have seen massive decline in absorption. From nearly 32.3 million sq. ft of space absorbed in the first half of 2019, absorption fell to 13.7 million sq. ft in the first half of 2020.
Similarly, cumulative supply addition was 13.5 million sq ft in H1 of 2020, compared to 26.6 million sq. ft in H1 of 2019, according to a Savills India report.