India fund can only help 6% of stalled projects

Modi is keen to revive real estate industry to boost demand

India’s plan to set up a Rs250 billion (Dh12.96 billion, $3.5 billion) fund to salvage stalled residential projects will only be sufficient to complete about 6 per cent of constructions that are running behind schedule in Asia’s third-largest economy.

The new programme, announced by Finance Minister Nirmala Sitharaman on Wednesday, is an improvement on a $1.4 billion real-estate corpus announced in September and, unlike the previous plan, it will also support projects written off by lenders as bad loans. With $63 billion of housing projects stuck for lack of funds, the latest measure will help unclog the financing pipes, said Anuj Puri, chairman of Anarock Property Consultants.

The fund size isn’t enough to cover the entire problem but will act as a “lubricant to start the wheel that had been jammed,” Puri said in an interview to BloombergQuint. Once projects are revived and completed, money will start circulating in the system, which will help all developers, he said.

Prime Minister Narendra Modi is keen to revive the real estate industry to boost demand and kick-start an economy that’s expanded at the slowest pace in six years for the quarter ended June 30. Still, developers say authorities need to carefully structure and price the fund, and roll it out quickly, for it to succeed.

The new fund “will be in the form of an alternate investment fund with the government contributing Rs100 billion,” Sitharaman said. State-run insurer Life Insurance Corp, State Bank of India and others are likely to contribute the remaining Rs150 billion.

There are 1,600 stalled housing projects with around half a million incomplete dwelling units that could benefit from the fund, Sitharaman said. The decision was taken after a discussion with stakeholders and the central bank.

Timeline

The fund could take as much as six months to be operational, screening of eligible projects will need time, and “at best” will help around 16 per cent of stalled projects “over a period of time,” Jefferies analysts led by Bhaskar Basu wrote in a note.

In all, about 576,000 projects worth some Rs4.6 trillion are running behind schedule across seven big Indian cities, according to Anarock data.

A series of shocks in the last few years, from the unexpected withdrawal of high-value rupee notes in 2016 to the sales tax introduced the following year, have dented property-market sentiment and caused funding for developers to dry up.

“The devil lies in the details,” Boman Irani, chairman of Mumbai-based developer Rustomjee Group, said by phone. For the fund to be viable, real estate companies mustn’t have to pay more than 9 per cent, which may hamper interest from external investors, he said.

This last-mile funding should be made the most senior debt in the waterfall, according to analysts at Nomura Holdings Inc and Anarock’s Puri.