Center’s $ 3.5 billion zombie house experiment begins to pay off
By Dhwani Pandya
A 25,000 crore rupee ($ 3.5 billion) fund set up by the Indian government to complete stalled housing projects is expected to deliver its first finished apartments in 2021, providing a model for a problem that has wiped out the savings of thousands of bankrupt home buyers and developers.
The fund will deliver some 16 projects or more than 4,000 homes in the fiscal year starting April 1, said Irfan A. Kazi, chief investment officer at SBICAP Ventures Ltd., the government-appointed manager of the investment fund. alternative. 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 stalled projects such as an economic slowdown and a cascading credit crunch in the industry. Builders were unable to repay their loans, forcing banks to write off debts and escalate what was already one of the biggest piles of bad debt 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 given approvals to approximately 159 projects involving an investment of approximately Rs 14,500 crore rupees, which will complete approximately 100,000 homes. Of these, around 47 projects (5,000 crore rupees) have received final approval, but 112 are early stage approvals, for which due diligence is pending. We do not disclose the amount of disbursements because we only grant funding based on the progress of the project; two projects will complete construction by April.
Q. What kind of returns do you expect?
A. We take care of assets and cash flow first. So when the projects are finished, we are the first to get our money back. Existing lenders must agree to take over 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. Were there any refoulements?
A. Lenders opposed our first charge on repayment, but as our transaction history shows, this barrier is gradually being reduced. We now allow security sharing with lenders and cash flow sharing to some extent. We continue to have internal discussions and also 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 percent in the fund, Life Insurance Corp. and State Bank of India each have 10 percent and the rest are other public and private sector players. Global funds have not shown much interest for several reasons: They prefer office and warehouse rental assets to residential buildings. They also expect returns in excess of 20 percent to account for risks, including asset class and the exchange rate, at which level our projects will be loss-making. So far we have raised Rs 10,000 crore (out of the planned total fund size of Rs 25,000 crore), but the government has assured us that more will be available if needed.
Q. What kind of challenge has the fund faced?
A. In many cases, we are dealing with lower echelon companies, which have lost manpower and some do not even have a financial team anymore, so due diligence can be difficult. A certificate of no objection from existing lenders has only come up in some cases and takes an extremely long time. Then there are also pending court cases or home buyers demanding compensation.
Q. What would 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 metrics like setup time, fundraising time, we’re probably the fastest. The fund was set up one month after the official announcement (2019), the capital was raised in one month. No real estate fund, I believe, has done more than 100 transactions probably in its lifetime. We are now close to 150 transactions. But stranded housing is still a huge problem and it is a growing problem. (NOTE: India had around $ 63 billion in 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. Prior to establishing the fund, we did a market research which found that around 40 percent of troubled projects were in the National Capital Region, around 25 percent in the Mumbai metropolitan area and the top seven cities accounted for about 85 percent. of all projects stalled. 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 percent of the submissions we receive are through our website.
Q. How has the pandemic affected you?
A. When the distress in the environment increases, our flow of transactions increases. Then around Diwali (the Hindu holiday celebrated in November 2020), there was a significant improvement in real estate sentiment due to government measures including emergency credit lines and stamp duty cuts, which brought relief. some promoters who then withdrew their requests. But since January, the deal flow has improved again as developers wonder if the recovery in sales will continue.