In the recent past, we have seen many announcements made by Finance Minister Nirmala Sitharaman, in an attempt to revive the economy. One of the latest measures has been the announcement of a Rs 25,000 crore bailout package, called the alternative investment fund, (AIF) for the real estate sector. Accordingly, the Centre will pitch in with Rs 10,000 crore while the remaining will be contributed by the Life Insurance Corporation of India (LIC) and State Bank of India.
If you are wondering why the real estate sector needs this bailout, read on.
The main reason is to fund the many housing projects that have hit roadblocks. According to the government’s own announcement, there are nearly 1600 projects that have been stalled. These projects comprise a whipping 4,58,000 housing units. The bailout aims to kickstart these projects. The bailout will be made available for projects for projects with price range of up to Rs 2 crore and Rs 1.5 crore for the Mumbai Metropolitan Region and National Capital Region — MMR and NCR, respectively. The funding will be up to Rs 1.5 crore for cities such as Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata and Pune. For the rest of India, the funding will be up to Rs 1 crore.
The amount of funding earmarked for a project is Rs 400 crore, according to the government’s bailout announcement.
(Source: The Hindu*)
The real estate sector, which is currently valued at US $120 billion, according to the Niti Aayog (1) is undergoing a slowdown. Housing sales dropped by 25 per cent during the quarter ended September 2019, according to Real Insights, a report by PropTiger (2). The report, which covered nine cities across the country also pointed out that new launches too plummeted by 45 per cent during the second quarter FY20, as compared to the same period last year.
The 2019 Knight Frank half-yearly report (3) pointed out that the residential realty market in Mumbai saw the highest unsold inventory. That figure stood at 136,525 units in MMR, while in NCR, that figure stood at 130,000 in H1 2019.
The bailout aims to improve the scenario across the country, and Mumbai and Gurugram, which have more unsold units than other cities, will benefit.
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Will the bailout help?
Expert opinion is divided on how much of a difference the bailout package will make. While many agree that the funding will have a positive impact, there is scepticism over the size of the fund. The total value of the stalled projects in just the NCR and MMR regions, according to a news report, (4) stands at Rs 3,60,000 crore. The overall value of unfinished projects in seven cities stands at Rs 4,64,300 crore, the report adds. Clearly, the Rs 25,000 crore announced as bailout is just a fraction of this overall value.
Meanwhile, the other cause of scepticism is that the bailout will only add to the bulk of unsold inventory. According to India Ratings and Research (Ind-Ra) analysis (5), the bailout will not have any impact on demand, and increase supply. So, this will further add to the demand-supply imbalance, it implies. Also, it points out that the supply will largely be seen in the MMR and NCR regions.
However, looking at the positives, the fund is certainly a boon for those buyers who are waiting to take possession of their property. It will also help in the revival of projects that were earlier tagged non performing assets, and boost the situation of housing finance firms and non-banking financial companies (NBFCs).
The bailout is a good first step for a sector that is ailing and is need of urgent help, but more could be done to improve the scenario. Expert opinion points in the direction of streamlining of taxation, considering that realty developers now have to pay taxes in many forms, such as GST and stamp duty. Relief on this front may boost affordability and enhance demand. The bailout package is definitely a most welcome beginning.
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Read more about Government Housing Schemes
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