The Indian real estate sector was already grappling with liquidity starvation, a slowing economy, and subdued housing demand; and now from nowhere is struck by COVID-19 pandemic. Before the coronavirus outbreak pandemic hit the property sector, real estate was recovering slowly after a long period of consolidation.
RBI (Reserve Bank of India) and the government of India are taking a multi-prong strategy to revive the real estate sector. A raft of decisions was announced including the creation of INR 25,000 crore alternative investment funds, putting housing sector lending into the priority sector classification for borrower and loan restructuring extension by one year for real estate developers.
According to Square Yards Research, around 1,73,000 housing units are struck in various under-construction stages due to cash crunch in top seven cities. Due to uncertainty and lack of trust among home buyers towards real estate developers, they are showing aversion towards under-construction properties and are switching to ready-to-move homes. Our real Estate data suggests that in the last four years, the sale of ready-to-move properties has witnessed a jump in demand from 11% in 2014 to 25% in 2019.
The banking sector is facing a triple whammy from NBFCs (Non-banking Finance Companies) & HFCs (Housing Finance Companies), their own direct exposure to real estate developers, and individual home loan borrower’s non-repayment. The banks and central financial institutions are saddled with bad loans to the tune of USD 150 billion with nearly USD 10 billion of principal and interest repayment maturing in the first half of 2020.
With stringent measures adopted by RBI, banks’ gross NPAs assets fell to 9.3% from 11.5% in the last year. As reported by RBI in the Financial Stability Report released in December 2019, loan disbursal towards real estate companies grew to INR 2.01 lakh crore in June 2019, up from INR 1.05 lakh crore in June’2016.
As per a property consultancy firm, projects worth USD 25 billion is stalled in various cities across India. According to data from the Insolvency and Bankruptcy Board of India, as of June 2019, there are 421 real estate developers undergoing corporate insolvency resolution process (CIRP), up from 209 in September’2018.
In the last 3-4 years, Indian real estate was battling liquidity crunch, stalled projects, high unsold inventory, poor prices, and bad loans. Despite all the above-mentioned reasons, the overall situation looks grim. However, recent announcements made by RBI such as priority sector classification for real estate lending from bank & extension of the loan restructuring and progress in bankruptcy resolution will revive the sector in the short and long term.
Loan restructuring extension by one year will help ease the asset quality or struck projects’ pain in the near term. It will buy some time for cash-strapped developers for maintaining and managing cash flows and help them complete several stalled projects. With this, the long-standing demand of the real estate industry for asset classification has been addressed.