Government Special Fund To Help Complete Stalled Affordable And Middle-Income Housing Projects

Last-mile fund for stalled housing projects necessary and timely, but limited in scope say experts.

The silhouette of a contractor is seen hammering a nail into wood framing for a house under construction. (Photographer: Luke Sharrett/Bloomberg)
The silhouette of a contractor is seen hammering a nail into wood framing for a house under construction. (Photographer: Luke Sharrett/Bloomberg)

Finance Minister Nirmala Sitharaman announced the creation of a special fund to provide financing to the many stalled affordable and middle-income housing projects in the country.

This will benefit approximately 3.5 lakh dwelling units, said a finance ministry official at the press briefing held by the minister. The government will contribute Rs 10,000 crore to the fund, and expects a similar-sized contribution from external entities such as Life Insurance Corporation, banks, sovereign funds etc.

This is among the third set of measures announced by the minister in recent weeks in an attempt to boost growth in the economy. The combination of new laws such as RERA and GST, a liquidity crunch across home financiers and slowing consumption demand across many sectors of the economy, has left several housing projects stalled and real estate companies insolvent. Consequently, a large number of homebuyers have been left stranded, having paid all or most of the money to purchase the apartments but yet to get delivery of them.

The key features of the special fund announced on Saturday, are -

  • To provide last mile funding for projects that are 60 percent complete
  • For projects in the affordable and middle income category
  • Applies only to positive networth, non-NPA and non-NCLT projects
  • Fund to be set up as a Category II – Alternate Investment Fund (AIF) Trust
  • To be professionally managed

“The objective is to focus on construction of unfinished units,” said the ministry’s presentation.

The move has been broadly welcomed by stakeholders pending some fineprint that will determine the scale and scope of the solution.

“This is a major boost to the housing sector (affordable and mid segment) and a perfect festive treat for lakhs of homebuyers who have been anxiously waiting for their prized possession, said Anuj Puri, chairman of Anarock Property Consultants, in an emailed comment.

Pankaj Kapoor, managing director of Liases Foras, also a property consultant, agreed. Though he pointed out that the benefit of such a fund may not extend to a developer who doesn’t have payback capacity.

“When the fund gives money, the payback will be done through the sale of unsold inventory. But if there is a project where the developer has sold all the units and yet has run out of the capital it will be difficult (for the fund) to take up such projects. But having said that this is good enough step for projects which are genuinely stuck due to paucity of funds,” Kapoor said to BloombergQuint on the phone.

The special fund will be of “ huge help” to the real estate industry, said Keki Mistry, vice chairman and CEO of India’s largest housing finance company – HDFC Ltd.

At an estimated Rs 20,000 crore in contributions (government and private), which when leveraged can be scaled by 0.3 - 0.5 times, the fund can “go a long way in putting money into a lot of these kind of projects,” Mistry said to BloombergQuint. He added that HDFC would participate once the full details were released.

This fund is not enough to give relief to the real estate sector as a whole, Puri noted. “There are more than 5.5 lakh units that are stuck or delayed in top 7 cities alone which would be much higher if we consider all cities and towns.”

There is also considerable apprehension that the benefit of the fund may be restricted by the many exclusions mandated by the government.

Fine Print To Determine Scope Of Fund Impact

For instance, the fund will extend finance only to affordable and middle-income housing, non-NPA (non performing assets) and non-NCLT projects, as per the government presentation.

Finance Ministry Presentation (Source: PIB)
Finance Ministry Presentation (Source: PIB)

Non-NCLT Projects Only

That means all stalled projects, of say, Jaypee Infratech Ltd., Amrapali Group or Unitech Ltd., that are currently under insolvency resolution at the National Company Law Tribunal, will get no assistance from this fund. Insolvency resolution process has been initiated against 421 real estate companies — the maximum from any sector, BloombergQuint reported earlier.

The decision to leave out insolvent projects is because the government is not keen on intervening in an ongoing judicial process. But the exclusion of these much-troubled projects has resulted in disappointment for those championing the cause of the thousands of stranded homebuyers.

“We are disappointed on exclusion of projects that are with NCLT and NPA,” M S Shankar, national secretary of the Forum for People's Collective Efforts, a homebuyers’ lobby group, told BloombergQuint.

However, we are confident that, as the finance minister mentioned during media interaction today, the inter-ministerial committee is working on the suggestions and layout to rescue those projects which amount to 30 percent of stuck projects across the country.
MS Shankar, National Secretary, Forum for People’s Collective Efforts

Affordable, Middle-Income Housing Only

The exclusion of projects being resolved under the Insolvency and Bankruptcy Code is the first lapse, said Niranjan Hiranandani, co-founder and managing director of Hiranandani Group, a prominent developer in Mumbai. The second lapse is the rider that the stress fund will only be for “affordable and middle-income housing”, Hiranandani said to BloombergQuint.

While the government has limited the fund to such projects to ensure assistance is extended to lower and middle income groups only, the limitation may not sit well across projects, as Hiranandani explained.

“When we do projects, they have studio apartments, one-, two-, three-bedroom apartments. Of 500 apartments if ten are 3-bedroom apartments they may not be considered as middle-income and affordable. Then what happens? Will you, because of those 5-10 flats which are of larger size, or which come under higher income bracket, not cover the project?”

Hiranandani also pointed out that due to the definition of “affordable housing” in Tier one cities (units up to 60 square metre in size or up to Rs 45 lakh in price) most stalled buildings in the Mumbai region will be left out of the ambit of this special fund.

Anarock’s Puri raised an additional point that needs clarification. “...there is no clarity of the price of mid segment homes that will be included in this move,” he said.

Non-NPA Projects Only

The decision to exclude non-NPA projects has also raised much concern.

If a developer has been unable to pay three monthly installments, the loan gets classified as non performing loan or an NPA, explained Mistry.

If those kind of cases also will not be eligible for this funding, then you are restricting the number of projects that could get covered in this scheme.
Keki Mistry, Vice Chairman and CEO, HDFC

Speed Is Of Essence

The lack of a timeline for the implementation of this fund has worried Jaxay Shah, owner of construction company Savvy Infrastructures Ltd. and the head of industry body CREDAI.

“My apprehension is that if the government delays this, even the healthy projects will become weak. We need more clarity on timing. We need treatment now, we can’t even wait for two weeks or one month because the festival season is coming. I think the government has failed to give confidence and sentiment boost to the real estate industry in housing projects also,” Shah said to BloombergQuint.

While glad for the current set of solutions, Shankar was hopeful that other recommendations, such as secured creditor status for homebuyers in an insolvency process, are also considered soon.

Also, “...the larger issue of demand creation has not been addressed in any way and form in these announcements,” said Shishir Baijal, chairman and managing director of property consultancy Knight Frank India.