- The Union Cabinet has approved setting up a special fund to provide last-mile funding to housing projects stuck across the country.
- The fund will seek to revive up to 4.6 lakh housing units in 1,600 projects with “positive net worth”.
- The total fund size is estimated at over Rs 25,000 crore with the Centre putting in Rs 10,000 crore, and State Bank of India and LIC injecting the balance amount into the fund in due course.
- The size of the fund can grow past Rs 25,000 crore as sovereign wealth funds and pension funds are also keen to join.
Background on trouble in the real estate sector
2008 global financial crisis:
- The roots of the crisis can be traced to the real estate bubble in the years leading up to the global financial crash of 2008.
- The crash led to a global credit freeze and real estate projects across the world were hit as lenders did their best to avoid this sector and India was no exception to this trend.
Declining purchasing power:
- With the economic recession and increasing inflation, many companies faced a slowdown and layoffs became common.
- As a result, there was an increase in unemployment, which reduced the purchasing power of the individuals and prevented them from investing.
- Research shows that even reputed builders and promoters are facing a pile-up of inventory, due to which, the builders are under pressure to lower prices.
- However, they are unable to do so because of high construction costs arising from liquidity issues and delays in obtaining approvals.
- As inventory keeps piling up, the construction of new houses is discouraged which leads to a slowdown in the growth of the sector.
Impact of NBFC crisis:
- As bank credit to the sector slowed and bank deposits soared post demonetization, banks outsourced lending to non-banking financial companies (NBFCs), which in turn stepped in to fund real estate developers.
- However, the NBFC crisis last year squeezed that channel of finance as well.
Details of the fund:
- The fund will be set up as Category-II Alternate Investment (AIFs) Fund registered with the Securities and Exchange Board of India (SEBI), and managed by professional fund managers.
- The fund will provide loans on commercial terms after assessing the viability of each project but will ensure that the money flows into an escrow account so that it is used only for construction purposes.
- A detailed investment policy will also be laid down for the selection of projects after a detailed due-diligence process.
- Due-diligence will include legal due-diligence, title due-diligence, micro-market analysis and financial analysis.
Relief for default on repayment
- The finance minister also indicated there may be some relief for those who have defaulted on repayment of their home loan EMIs in the stalled projects across the country.
- The RBI is expected to announce the details for regularisation of accounts, providing relief to several loan defaulters who had booked houses in projects that can now be taken up for revival.
- Funding will be provided only to those projects that are net worth positive and registered under RERA or The Real Estate (Regulation and Development) Act.
- Stuck projects classified as Non Performing Assets and those undergoing resolution under the National Company Law Tribunal will also be eligible for funding.
- This is a welcome change from an earlier proposal which barred such projects from support.
- There are many genuine developers who are solvent, yet facing liquidity challenge due to various reasons such as poor sales and buyers preferring ready-to-move-in apartments.
- This funding will enable such developers to complete their projects through this last-mile funding.
- The fund is expected not only to support the sector but also generate commercial return for its investors.
- It will, in due course, help relieve the financial stress faced by a large number of middle-class home buyers who have invested their hard-earned money.
- It will also restore trust between buyers and developers and boost the sentiments of the housing sector as a whole and release large amount of funds stuck in these projects for productive use in the economy.
- It will have a multiplier effect as it will lead to increase in demand for steel and cement, which will provide impetus to generate more employment.
- The Real Estate (Regulation and Development) Act, 2016 is an Act of the Parliament of India which seeks to protect home-buyers as well as help boost investments in the real estate industry.
- RERA was established to enhance accountability and transparency with respect to housing transactions and real estate.
- The Act establishes Real Estate Regulatory Authority (RERA) in each state for regulation of the real estate sector and also acts as an adjudicating body for speedy dispute redressal.
About: Alternative Investment Funds (AIF)
- Alternative Investment Fund means any fund established or incorporated in India which is a privately pooled investment vehicle.
- Alternative Investment Fund is described under Regulation 2(1)(b) of the Regulation Act, 2012 of Securities and Exchange Board of India (SEBI).
- AIF can be established in the form of a company or a corporate body or a trust or a Limited Liability Partnership (LLP).
- Generally, high net worth individuals and institutions invest in Alternative Investment Funds as it requires a high investment amount, unlike Mutual Funds.
Types of AIF
- As per existing SEBI classification, these private investment funds have been divided into 3 unique categories – Category I, Category II and Category III.
- The minimum qualifying corpus amount for these schemes is 20 Crores.
- The only exception to this rule is an ‘angel fund’, which is a subcategory of Category I AIFs, as they have lower qualifying criteria in terms of fund corpus at Rs. 10 crores.
Category I AIFs
- AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable
- It includes venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified.
Category II AIFs
- AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012.
- Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.
Category III AIFs
- AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.
- Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs.