With poor economic data coming in from all quarters, the government of India has been announcing various reforms and stimulus measures for the economic revival. In this regard, the specific measure for the real estate sector-in the form of the Alternative Investment Fund (AIF) of Rs 25,000 crore-is a step in the right direction. The real estate sector plays a very critical role in the economy; it contributes 6-7% to the GDP, apart from being a large employment generator. The health of the real estate sector, in fact, has a strong bearing on consumer sentiments, and housing-as we all know-also has socio-economic implications.
The real estate sector has strong linkages with the core sectors of the economy, such as steel and cement. Core sector growth has decelerated to 1.3% in the fiscal year so far, especially with a sharp deceleration in the cement sector to 0.7% in the period under review. Hence, a boost to the real estate sector will also help revive growth in the core sector.
In addition, we must not forget the linkages of the real estate sector with the financial sector. Any distress in the real estate sector and the developer's inability to pay their dues could have serious repercussions for the financial sector. In fact, banks' exposure to the real estate sector (through direct and indirect lending) was 21% of total loans and advances (in 2017-18), while the exposure of the non-banking financial companies (NBFCs) to the real estate sector was 6.6% of the total assets. Given that many of the real estate projects are declared NPAs (non-performing assets), under the National Company Law Tribunal (NCLT) there is a serious threat of real estate woes spreading to the financial sector through defaults.
Currently, the housing projects comprising 4.5 lakh units are unsold. Hence, the government's formation of the AIF to fund the last-mile credit requirement will help ease the logjam in the sector. More importantly, the scheme includes projects that have been declared as NPAs and also those that are under the NCLT, which was not the case when the government had announced the scheme for the real estate sector earlier in September. This last-mile funding avenue for stuck projects, in fact, will be a big relief for the developers as well as the homebuyers committed to these projects.
In the process, the revival in the construction activity will also have a multiplier effect on economic growth given its linkages to various industries. The real estate sector has linkages to a large number of ancillary industries like cement, steel, paints, furniture, copper, sanitary ware, etc.
While the intent of the government is praiseworthy, there are some concerns on effectiveness and implementation of the scheme. The fund size of Rs 25,000 crore could turn out to be small, relative to the overall requirement of the real estate sector. The sector has unsold inventory worth Rs 2.64 lakh crore. This fund size would only be able to take care of a small proportion of the stalled projects' funding requirement. Moreover, the private investors would be hesitant to join the fund given the risk involved. According to the scheme, any project will not be granted fund of more than Rs 400 crore, which may not suffice for some of the big projects, especially in the NCR (National Capital Region) and the MMR (Mumbai Metropolitan Regions).
The other critical aspect will be the implementation part. The government-released FAQs note that the investment manager can change the developer, if required. Nevertheless, it would be a challenge to manage these projects and bring them to completion. The investment manager will also have to ensure that the fund allocated for a project is not siphoned off to other projects. The timeline for the implementation of the scheme would be critical, as quick implementation would help generate better return for investors.
The government has, in the past also, announced measures to ease credit supply for the real estate sector through steps such as liquidity support for HFCs (housing finance firms) and partial government guarantee for assets purchased by a bank from stressed NBFCs/HFCs.
However, the other critical piece of the puzzle is the demand-side story. The AIF will not be able to generate the required returns unless the demand for real estate also picks up. Otherwise, the increase in supply will further add to the glut in the sector. Even with the real estate sector going through a lull period, housing prices in major markets have only corrected marginally. For instance, in the MMR, residential prices in H1-2019 have only corrected by 3%, while in the NCR these have gone up by 3% (year-on-year)-even though in some micro markets the price correction has been sharp). In fact, high prices and poor economic outlook have resulted in poor housing demand in the economy. Hence, it is very critical that the government also looks into reviving the housing demand in the economy.
The Indian government has already provided income tax deductions for the affordable housing segment. Further measures such as subsidised home loans, full tax exemptions on interest paid on home loans, categorisation of home loans up to Rs 1 crore as priority sector lending will help push up overall demand in the sector. Along with easing of supply-side constraints in the real estate sector, there is a need for the government to come up with further measures to trigger demand. Only then will the sector be able to revive in a true sense.
The author is chief economist & national director, Research, Knight Frank