For Real Estate to Revive, Restructuring of Loans is a Must
A systematic, case-to-case basis approach will improve cash flow in a liquidity-strapped industry
There was a time a few years ago when money flowed into the real estate sector on tap. However, over the past few years, the flow of capital has been slow and largely directed towards refinancing loans of existing projects.
Compared to what they were doing earlier, the traditional banking system, non-banking financial companies (NBFCs), and housing finance companies (HFCs) have been far slower in disbursing money to this sector.
Part of the story dates back to when banks refrained from providing loans for land purchases. Since then, PE funds and NBFCs emerged as top choices for funding real estate. But ever since the IL&FS crisis of 2018, followed by the DHFL and Yes Bank crises, NBFCs have been facing headwinds and are looking to ramp down their wholesale book, besides not providing new money.
With NBFCs in trouble, there aren’t many financiers who are providing capital to developers. And those who are, do it only to a few players. The takeaway is that there isn’t much funding happening in the sector. Leaving growth aside, this is also impacting projects which could have been completed. Here, the Centre’s SWAMIH fund has proven helpful for many stalled projects.
No one knows where financing in real estate would go from here. This raises two questions:
- What is the future of financing in real estate?
- Do we come up with a loan restructuring mechanism for NBFCs?
There’s actually a third question — do we continue with the current ways? That might not be the ideal option. It will be merely pushing out the problem and not solving it.
Among the main reasons for this liquidity crunch in real estate are:
- Reduction in overall sale value, since prices fell or stagnated over the last 4-5 years, hitting profitability and security cover for lenders.
- Larger loans given to projects thanks to ambitious developers and equally ambitious lenders.
- Post the DHFL crisis, NBFCs have faced increased borrowing costs at their end and have passed these on to lenders. While borrowers took variable interest rate loans, the numbers of those projects did not allow for 2-4 per cent per annum increases in many cases.
- Frequent refinancing/rejigging of loans to avoid NPAs, delayed payments, etc., which themselves come with additional costs.
Real estate is among the many sectors that have already reached out to Government of India, seeking a bailout package during the pandemic, as surviving without the looming threat of an NPA in the long term will be difficult.
For the future of the real estate sector, we need to have a strategic approach for financing. Using long-term financial methods of borrowing and lending money can be beneficial to the sector.
Expanding the scope of the government’s decision to allow restructuring of loans of real estate firms at the project level, rather than at the developer-level, beyond just the Covid-19 pandemic, will benefit both homebuyers and developers. A decision in this regard would help ease liquidity and enable construction to recommence in projects that have been stuck due to lack of flow of capital in the construction business.
The risk associated with each project should be separately evaluated by the lenders. A parent company cannot be held guilty for a subsidiary being a defaulter. In the absence of a practical approach towards loan restructuring for NBFCs, there is a threat that all projects could turn into NPAs at some point.
And this is a real threat, induced not only by the 2020 lockdown but also by the Covid second wave. Reduction of stamp duty, lower interest on home loans and benefits offered by builders have undoubtedly helped. But are they enough in the long run?
Threat is Real
The threat, of banking and financial institutions having either slowed down or completely stopped advances to real estate, is real, even as the sector too finds it difficult to repay. This though was the case even before the pandemic.
Many builders are caught with projects remaining stuck due to slow down in the market, with a mounting inventory of unsold units. This trend bucked slightly from December onwards, when stamp duty was reduced. Between January and March, developers sold 14,830 units in Mumbai, a 41 per cent change between the first quarters of 2020 and 2021. But since stamp duty and other sops were removed, the market has slowed down noticeably.
The government and RBI have initiated steps that benefit the sector, but these do not address the prolonged legacy problems. Backed by low-interest rates, stamp duty reductions and sops by builders, some units did get sold, but what about the long-term? This is where the argument for restructuring loans comes in.
Charting the Revival Path
There is fear that distressed real estate could assume the status of a separate category, if credit stress among developers continues to grow, as expected. In the last 5 years, there have been instances when developers did not gain from expected market trends of sale price increase, high volume sales, etc, and thus ended up in a cash-flow crisis.
Since receipts are lesser or worse than the payments one needs to make, money collected for a project gets used up for something else, and then the crisis stings. A lot of time and effort, meant to be spent on projects, is then spent on an exercise of raising financial resources, often futile.
In 2020, real estate was allowed to extend commercial loans by one year, if projects were delayed for reasons beyond the promoter’s control. This was not treated as restructuring, but the extension was a limited time offer, with short-term benefits.
For any long-term revival of the real estate market that truly extends benefits to developers and lenders alike, industry needs a comprehensive revision of real estate policy. In consultation with stakeholders, the government should focus on restructuring of loans to tackle what has been a systemic legacy problem for the builder community.
Today, they find it difficult to raise money or even carry out asset monetisation. Offering the sector a long road to loan repayment is necessary. Bringing in a revised restructuring policy for the real estate market, which focuses on stressed projects or those that are slow on sales, is a solution that needs to be explored.
The outcome should not only be providing developers with a bailout alone, but a means to ensuring project completion for the builder, cleaning up of books for lenders and homes for buyers. Restructuring loans systematically, on a case-to-case basis, will go a long way in improving cash flow in a liquidity-strapped economy, by offering a cushioning effect to the precarious financial condition, tanking sales and project delays — all that is needed to prevent an NPA tag.
Managing Partner, Pecan Reams
The writer is the Managing Partner of Pecan Reams, a real estate asset management, advisory and technology services company
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