A 250 billion rupee ($ 3.5 billion) fund set up by the Indian government to complete stranded housing projects is expected to deliver its first finished apartments in 2021, providing a model for a problem that has destroyed the savings of thousands of home buyers and developers go bankrupt.
The fund will deliver 16 or more 4,000 housing projects in the fiscal year starting April 1, said Irfan A. Kazi, chief investment officer at SBICAP Ventures Ltd., the manager of the government-appointed alternative investment fund. The Special Window for the Completion of Construction of Affordable and Middle-Income Housing Projects (SWAMIH) fund was announced in November 2019.
At the time, India had around $ 63 billion in projects stalled as an economic downturn and a cascading credit crunch in the industry. Builders were unable to repay their loans, forcing banks to write off debts and worsen what was already one of the largest piles of bad loans in the world. Prime Minister Narendra Modi’s government created the fund as a measure to unblock funding pipes.
Kazi spoke in a telephone interview on February 12. His answers have been edited for clarity.
Q. How much money was disbursed?
A. We have approved approximately 159 projects involving an investment of approximately Rs 145 billion, which will complete approximately 100,000 housing units. Of this total, around 47 projects (Rs 50 billion) have received final approval, but 112 are early stage approvals, for which due diligence is pending. We do not disclose the amount of disbursements as we only grant funding based on project progress; two projects will complete construction by April.
Q. What kind of feedback do you expect?
A. We take care of the assets and cash flow first, so when projects are completed we are the first to get our money back. Existing lenders must agree to take on the second charge. We invest through non-convertible zero coupon debentures. All our investments are made at a standard internal rate of return of 12% on all projects.
Q. Was there a refusal?
A. There has been strong resistance from lenders about our first charge on repayment, but as our transaction history shows, this hurdle is gradually being overcome. We now allow collateral sharing with lenders and cash flow sharing to some extent. We continue to have internal discussions and with the Ministry of Finance on the criteria that can be relaxed.
Q. Who are your investors?
We have 14 investors, the government has 50% in the fund, Life Insurance Corp. and State Bank of India each have 10% and the rest are other public and private sector players. Global funds have not shown much interest for several reasons: They prefer profitable office and warehouse assets to housing. They also expect returns of over 20% to account for risks such as asset class and exchange rate, the level at which our projects will be loss-making. We have so far raised 100 billion rupees (of the 250 billion rupees planned for the total fund), but the government has assured us that more rupees will be available if needed.
Q. What type of challenge has the fund faced?
A. In many cases we are dealing with the lower echelon of companies, which have lost manpower and some do not even have the financial team anymore, so due diligence can be difficult. A certificate of no objection from existing lenders has only arrived in some cases and takes an extremely long time. Then there are also ongoing legal cases or homebuyers seeking compensation.
Q. What do you count as success?
SWAMIH is a social impact fund to complete the construction of blocked houses. It is also our performance criterion. When you look at parameters like setup time, fundraising time, we’re probably the fastest. The fund was created in a month after the official announcement (2019), the capital was raised in a month. No real estate fund, I believe, has probably made more than 100 transactions in its lifetime. We are now close to 150 transactions. But housing immobilization is still a huge problem and it’s a growing problem. (NOTE: India had around $ 63 billion in such stalled projects in its seven largest cities in 2019, which rose to $ 55.8 billion in December 2020, according to Anarock Property Consultants)
Q. How and where does the fund work?
A. Before establishing the fund, we did a market research which found that around 40% of stressed projects were in the National Capital Region, around 25% in the Mumbai metropolitan area and the seven major cities. accounted for about 85% of all blocked projects. However, we are a pan-Indian fund and provide democratic access to developers located anywhere in India where the Real Estate Regulation and Development Act is applicable; in fact, over 90% of the submissions we receive come from our website.
Q. How has the pandemic affected you?
A. When the distress in the environment increases, the flow of our transactions increases. Then around Diwali (the Hindu festival celebrated in November 2020), there was a significant improvement in real estate sentiment due to government measures, including emergency lines of credit and reductions in stamp duties, which offered a relief to some developers and they then withdrew their requests. But since January, the flow of transactions has improved again as developers question whether the recovery in sales will continue.
(Except for the title, this story was not edited by NDTV staff and is posted from a syndicated feed.)