Explainer: What does Nirmala Sitharaman’s ‘special window’ for unfinished housing projects offer?

Buzz emerged this week that India’s Finance Ministry would take another crack at arresting the slide in the economy through a special package of investment and altered policies. Ever since Finance Minister Nirmala Sitharaman acknowledged the slowdown India is facing, she has unveiled a number a policy moves, each of which has been touted as the solution to the country’s severe economic woes. This week, Sitharaman attempted to tackle real estate.

While the government’s own FAQ page covers most of the details, it is a bit heavy on jargon. So here is a short Hard Times explainer on what exactly this means for India’s real-estate sector, and what effect it could have on the economy:

What was announced?

Sitharaman emerged from a Cabinet meeting on Wednesday to say that the government had approved the establishment of an Alternate Investment Fund for stalled housing projects. She said that the fund would be of about Rs 25,000 crore, with the government likely to put in Rs 10,000 crore, while the State Bank of India, the Life Insurance Corporation and others providing the remainder in due time.

What will this fund do?

The Alternate Investment Fund will basically provide an opportunity for a fresh injection of cash to developers that have seen their housing projects run into trouble and remain incomplete. The government has zoomed in on the real-estate sector as being a crucial piece of the economic slowdown puzzle, with a huge amount of money caught up in incomplete projects.

The feeling was that if too many of these projects go bust, as has been happening because of the slowdown, it would have a debilitating effect on the rest of the economy. The fund offers a way out for at least some portion of the troubled projects, and brings hope to those homebuyers who were worried that the money they gave to developers had gone to waste.

Who can access this fund?

The focus of this “special window” of funding from the government is those projects that are stalled for lack of construction funding. It will be up to the investment fund, which will be managed by the State Bank of India, to decide where its money goes.

Specifically, the projects will have to come under certain criteria:

• Stalled because of inadequate construction funding
• In the affordable or middle-income category, which means they do not exceed 200 sq m of “carpet area” and are priced below Rs 2 crore in Mumbai, Rs 1.5 crore in Delhi-National Capital Region, Chennai, Kolkata, Hyderabad, Pune, Bangalore and Ahmedabad or Rs 1 crore anywhere else.
  
• Are net positive worth, meaning the value of the unfinished project – both the portions that have been sold as well as the unsold inventory – is more than what it would take to finish construction and pay off dues
• Is registered under the Real Estate (Regulation and Development) Act, known as RERA

In a press release, the government noted that “as per industry estimates, in the stalled category, there are about 1509 housing projects comprising of approximately 4.58 lakh housing units”, of which Sitharaman said 90% should be eligible or the new fund.

The government also said that “the maximum finance for any single project will be Rs 400 crore,” and that “ there will be caps put in place for a single developer and for any single city as well as part of the final detailed scheme”.

Is this new?

Sort of. Sitharaman first announced the special window for unfinished real-estate projects in September, as part of a bigger package meant to jumpstart the economy. At the time it was described as a Rs 10,000-crore fund.

Evidently, the finance minister listened to the criticism and feedback to that proposal, which suggested that Rs 10,000 crore was simply not enough. At the time Sitharaman had also said that the fund would not be available for projects that have been classified by lenders as Non-Performing Assets or those that had already been taken to the National Company Law Tribunal, which considers matters related to insolvency and winding up companies.

The fund will now be open to NPA and NCLT projects as well, as long as the actual process of liquidation has not begun and presuming they have a net positive worth, although the government or fund manager will have to explain how this will be calculated for those projects that are already part of tribunal proceedings.

Does this fix India’s real-estate problem?

According to Bloomberg, even if the Rs 25,000-crore fund is fully utilised in an extremely efficient manner, it will only be able to cover 6% of stalled construction in the country. Another analysis puts the number “at best” at 16% of stalled projects. So it will not, by itself, resolve the woes of the real-estate sector, which have threatened to drag down the entire economy even further.

Instead, the hopes is that, by pushing money into the sector and assisting in the completion of projects that were otherwise written off, the fund will act as a catalyst and bring fresh energy into the real-estate space.

Indeed, in February, Bloomberg’s Andy Mukherjee warned that India is “sleepwalking to trouble on debt of real estate developers”, saying the danger of too many of these projects being stuck or going into insolvency proceedings could have a major effect on the rest of the economy. The government is hoping its special window will prevent that eventuality.

“Since the real-estate industry is intrinsically linked with several other industries, growth in this sector will have a positive effect in releasing stress in other major sectors of the Indian economy as well,” the government said in a statement.

What do we not know yet?

There are still many questions about how the fund will actually operate and what sort of terms it will provide to developers whose projects were stalled or declared NPAs. In the case of projects that are caught up in NCLT proceedings it will be even more complicated. Will the fund acquire those projects altogether? How will it evaluate requests? All of this will have to be explained in due time, and some if it will only become clear when the fund actually begins operating.

And then there is even a concern about the fund being successful.

If a large number of these stalled projects are completed, yet remain unsold, they simply add to the existing inventory of the sector. There are already a huge amount of unsold housing units in India, thanks to a drop in demand. “The demand-supply imbalance is likely to worsen, and if overall housing demand does not witness a recovery, pricing pressure in the sector is likely to be exacerbated,” said India Ratings and Research, a unit of the American credit ratings agency Fitch, in a report.

Scroll.in’s Hard Times series seeks to provide you with simple explainers and valuable insights into the state of the Indian Economy. Read previous pieces in the series here.