In an exclusive interview, Ankit Kansal of 360 Realtors talks about the problem of stressed assets in India's real estate market and how could this growing challenge be managed.
Real estate in India is suffering from a large overhang of stressed or stuck inventory, which has accumulated over the years. So, a challenge like stressed real estate would not need an even-handed homogeneous approach. Rather, it would require a multi-layered approach to infuse more liquidity into the sector, incentivize developer funding, and recapitalize NBFCs and HFCs, says Ankit Kansal, Founder & MD, 360 Realtors.
In an exclusive interview with Sanjeev Sinha, he talks about the problem of stressed assets in India’s real estate market and how could this growing challenge be managed. Excerpts:
Why are Stressed Assets becoming a major bottleneck in the Indian real estate market?
Real estate in India is suffering from a large overhang of stressed or stuck inventory. It has accumulated over the years and is not an overnight phenomenon. Market research has shown that there are over 450,000 projects which are stuck either due to financial hurdles or litigation-related challenges. The total amount of capital parked in such units is to the tune of around $65-70 billion, which is a large sum of money.
How has so much stress accumulated in real estate, despite a favorable economic momentum and healthy demand?
Despite a healthy demand for real estate and economic growth that mostly outperformed most of the emerging and major economies of the world, stressed real estate also lingered and has blown up over the years. In many markets, incremental new launches outpaced the demand, leading to market disbalance. Further, the NBFC crisis and liquidity crunch in recent years have made it very difficult for developers to raise funds and capital. The COVID crisis has further intensified the woes of the developer fraternity. Moreover, most of the buyers are now preferring Ready to Move (RTM) properties, which is also a backlash for many under-construction projects.
Have government agencies not taken up the matter up the sleeve?
Yes, the government has done its part. A $3.8-billion (Rs 25,000 cr) package was announced last year. As a part of the package, under the Special Window for Affordable and Mid Income Housing (SWAMIH), over Rs 12,000 crore have been deployed. Although a prudent initiative, the government-backed fund, which is managed by SBICAP, will fall short looking at the magnitude of the crisis. Moreover, the fund is dedicated only to affordable and mid-income projects, which keeps a large inventory of stuck units outside of its purview.
What could be other alternatives to manage the growing challenge of stuck assets? How can the private sector play a more proactive role to devise a solution?
The private sector needs to come forward to manage the challenges of stressed real estate in the country. To bridge the funding gap, it is essential to channelize investments from other private alternatives such as PE players, NBFCs, Venture Capitals firms, HNIs, and retail investors. Besides funding, it is also essential that all the major stakeholders including investors, developers, contractors, and consulting companies work in a synchronized fashion to complete, market, and sell the project.
We at 360 Realtors have also partnered with Rising Straits, a well-known real estate PE player, to launch our maiden Alternate Investment Fund (AIF) of Rs 100 crore, namely, 360 Rising Straits Fund. Our inaugural fundraising is set to be concluded very soon. In total, we are targeting total fundraising of Rs 500 crore by the end of this year.
While Rising Straits will offer crucial support in managing funds, we, as one of the largest real estate advisories, will help in project identification, construction monitoring alongside sales and marketing of the inventories. Fundraising activities will be done by both of us.
It is noteworthy to understand that raising, allocating, and managing the fund would not render desired results unless proper mechanisms are put in place to monitor remaining construction, market it effectively and sell the inventories. Such an initiative looks prudent as it accommodates all the stakeholders involved. The investor can register smart profits, the developer can get an exit, and the homebuyer finally gets the possession.
Channelizing private sector participation is seeming a possible alternative to tackle the challenge. However, why would investors make investments at a time when economic uncertainties are yet to subside?
Already across the globe alternative investments are on a rise as traditional sources of wealth creation are feeling the heat. The same is true about real estate AIFs, which can give much higher returns along with mitigated risks.
Numerous factors make an AIF a very exciting proposition to enter into. Firstly, many such projects are 60-70% complete and all they need is kickstart or last-mile funding for the remaining work. Once the funds are provided, the remaining tasks can be completed and the inventory can be turned around. This not only completes the inventory but also enhances the overall cash flow of the project and strengthens the books. Secondly, most developers of stressed projects are not looking for any profitability but a safe exit. This helps in getting deep discounts. In stressed assets, one can make up to 30% discounts which help in multiplying profitability.
Thirdly, investments in such projects are also protected through regulatory clauses, which further makes them risk-averse. For instance, 360 Rising Strait’s fund is registered with SEBI and the regulatory body is timely notified about all the transactions. We have fixed a hurdle rate of 18%, which means we are eligible to earn commissions only following a disbursal of a minimum return of 18% to the fund investors.
Apart from AIFs, what else can be done to manage stressed real estate in the country?
A challenge like stressed real estate would not need an even-handed homogeneous approach. Rather, it would require a multi-layered approach to infuse more liquidity into the sector, incentivize developer funding, and recapitalize NBFCs and HFCs. Easy credit options and need-based funding should be devised for projects which are nearing completion and are saleable. The government should also not rule out partnering with other private AIFs and institutional entities to build capital for kickstart and last-mile funding.