While some real estate experts said SBICAP’s decision to reduce IRR to 12 percent is a positive move, others said many issues such as lenders not willing to give a no objection certificate (NoC) still remain.
SBICAP Ventures, the manager for the government's Rs 25,000-crore stressed asset fund, has decided to cut the internal rate of return (IRR) to 12 percent from 15 percent.
While this is expected to help real estate developers in the mid and affordable housing segment to fund their ongoing projects, which may have suffered due to the lockdown and also help expedite the process of buyers getting their homes, experts said the main challenge of existing lenders not willing to give a no objection certificate (NoC) until they receive equal status still persists.
SWAMIH INVESTMENT FUND I is the name of this Rs 25,000 crore special window announced by the government in November last year.
Sources told Moneycontrol that even during lockdown, as many as 50 projects have received preliminary approvals and 8-9 projects have been given final approval. The total funding involved in these 50 projects is over Rs 5,000 crore.
These investments are linked to progress in construction work and will pick up post the lockdown.
"The investments in these projects are construction linked. Since no construction took place on sites in the last two months due to COVID-19, no payment has been released. There is also an escrow mechanism in place to ensure that there is no fund diversion. As soon as lockdown is lifted and actual construction begins on site, we are hoping that there will be a spurt in disbursal in the next two to three months," sources said.
Legal processes involving signing of documents/agreements, stamping will also be undertaken post the lockdown, they said.
Will SBICap’s lowering of IRR to 12% from 15% help?
Irfan A Kazi, chief investment officer, SWAMIH Investment Fund I in a post on LinkedIn said: "We have taken another step forward to support the real estate sector...Given the extraordinary circumstances, SWAMIH Investment Fund I shall now provide construction funding at a 12% IRR."
While some real estate experts said SBICAP’s decision to reduce IRR to 12 percent is a positive move, others said many issues such as lenders not willing to give a no objection certificate (NoC) still remain.
The reduction in the rates will potentially allow more development companies to approach the fund. This will help the developers in the mid and affordable housing segment to fund their ongoing projects which may have suffered due to the current lockdown, they said.
"We feel that this has come at an opportune time when the lockdown is being eased out, an early deployment will allow the development companies to restart construction and complete their projects at the earliest possible. This will also provide relief to those home buyers whose homes are delayed due to lack of funds as this will help expedite the process of buyers getting their homes," said Shishir Baijal, Chairman & Managing Director, Knight Frank India.
Realtors say many issues still remain.
The first is to do with the fact that existing lenders would like to give pari passu (equal footing) charge to SWAMIH, not first charge.
The second issue is that existing lenders would want to share sales cash flows of the project in pari passu manner
SWAMIH has also insisted on getting an NOC from all existing buyers that they would not move any litigation under IBC or RERA post investment of SWAMIH.
"This is an impossible ask. No one can fulfill it," said realtors.
Even with regard to the rate of interest charged, it is still too high. “The objective of GOI is to finish stuck projects and deliver homes, not to make super normal profit,” they say.
Also, SWAMIH is assuming extremely conservative positions vis-a-vis, the time to complete the project, future sales or collection. It assumes no cash flow will come in the project till completion. This assumption forces it to increase its loan size which in turn reduces the balance cover in the project, they say.
Credai, in a letter to the prime minister Narendra Modi last month had demanded “quick operationalisation” of the Rs 25,000 crore stress fund for completing stalled housing projects be deployed at the earliest.
"The fund has achieved its first closing at Rs. 10,500 crore very quickly. However, actual disbursements from the project have been minimal. The chief constraint in the operationalisation of the fund is the rigidity in its mandate, wherein the existing lender (banks/ NBFC's/HFC's/) is not being accommodated at all,” Credai conveyed in the letter.
Secondly, the AIF expects a return on its investments in projects, which is very high given the fact that the projects in the ambit of the fund are "stalled".
This high RoI leads to an increased in project cost, which eventually passes on to the already aggrieved homebuyer.
"Given the current crisis at hand, it is only fair to ask that the fund given by GOI is disbursed quickly to complete stuck projects. Given the cuts in repo rates announced by RBI to 4 percent, the fund should be given within an expected RoI of 8- 9 percent," Credai had said.
In November last year, the central government announced a Rs 25,000-crore fund to help complete over 1,500 stalled housing projects, including even those that have been declared NPAs (non-performing assets) or admitted for insolvency proceedings. The move is likely to help 4.58 lakh housing units across the country. Only RERA-registered projects with positive net worth will be provided funds.
In February, the government said over Rs 540 crore had been invested in some stuck residential projects.
The alternative investment fund (AIF), set up to provide last-mile funding for stalled real estate projects by the government, had cleared Rs 540 crore for two housing projects in Mumbai and Bengaluru earlier this year. The fund had received maximum deals from NCR and MMR region as also from other five top cities. Deals had also come in from Dehradun, Bhiwadi, Goa, Nashik, Jaipur, Bhopal, Amritsar, Coimbatore, Vizag and Surat.
