Asset reconstruction companies (ARCs) are set to see an increase in the cumulative recovery rate for stressed residential real estate projects by 500-700 basis points (bps) to 16-18% as of March 31, 2025, from 11% as of March 31, 2024, according to rating firm Crisil.
This will be driven by improved viability of stressed projects due to healthy demand and price appreciation in residential real estate, alongside greater investor and promoter interest in reviving such projects, Crisil noted.
Additionally, recent amendments to the Insolvency and Bankruptcy Board of India (IBBI) regulations for real estate projects should bolster the resolution of stressed real estate assets in the medium term.
An analysis of the Crisil Ratings security receipts (SRs) portfolio, which includes approximately 70 stressed real estate projects (covering a saleable area of about 66 million sq ft) with outstanding SRs of roughly Rs 9,000 crore, it said.
Healthy economic growth and strong residential demand across housing segments in the top six cities are projected to lead to 10-12% growth in residential realty demand this fiscal year. Low unsold inventories in major micro-markets will also assist ARCs in turning around stressed real estate projects more rapidly, with support from promoters or external investors.
About three-fourths of the projects analysed became non-performing assets (NPAs) between 2019 and 2022 and were impacted by declining sales and slower collections during the Covid-19 pandemic. The remaining projects are pre-2019 NPA projects that faced liquidity issues due to weak demand, the ratings firm said.
Mohit Makhija, senior director at Crisil Ratings, said: “Stressed realty projects are becoming viable for last-mile funding as approximately 33 million sq ft of unsold inventory for projects analysed is likely to be sold at appreciated market prices due to significant price increases over the last two fiscals and healthy demand for residential real estate. Also, the emergence of distressed asset credit funds is expected to improve the accessibility of last-mile funding for project completion, supporting faster restructuring of debt by promoters with ARCs.”
This trend is reflected in the Crisil Ratings SR portfolio, where 40% of the stressed projects are expected to secure last-mile funding from external investors, while the remainder will receive funding through joint venture agreements and development management models initiated by promoters.
Moreover, the amendments in the IBBI regulations specific to the real estate sector, made in February 2024, are likely to expedite the resolution of stressed real estate projects through the Insolvency and Bankruptcy Code (IBC) for ARCs in the medium term. These amendments allow for the resolution of individual projects by delinking them from the entire corporate entity involving multiple projects and group inter-linkages.
These amendments were crucial, given the slow pace of admission and resolution of cases under the IBC observed in the past. Only 8% of the admitted cases have been resolved under the IBC, with debt worth approximately Rs 40,000 crore stuck across 100 ongoing realty cases for more than 2.65 years.
Sushant Sarode, director at Crisil Ratings, said: “With improved flexibility for lenders to separate good projects from stressed ones, more project-specific resolutions are expected to get admitted in the IBC. We believe streamlining the process for effective implementation of the amendments will go a long way in strengthening the code for real estate sector cases through speedy resolution of ongoing and future cases to achieve value maximisation for all stakeholders.”