The government’s latest policy package to revive and boost the cash-strapped construction and realty sector by putting in place a mechanism to release funds that are stuck in arbitration is a significant move for the industry and the economy.
Under the new norms, 75 percent of the amount against guarantee will be released in cases where a given award has been contested by government authorities. This is a big relief for the sector that has around Rs 1 lakh crore under arbitration. The notable, related reform measure -- granting permanent residency status to foreign investors aimed at facilitating greater investment -- will further bolster liquidity.
The government’s stimulus reflects its priority to the construction sector and is quite justified, considering that it contributes eight percent to the GDP and generates huge employment to revitalise the economy. That’s precisely why Prime Minister Narendra Modi has gone on record as saying that the three-year period (2011-12 to 2013-14) of stagnation, with a large number of stalled projects, had badly hit the economy.
The new policy is aimed at reducing the debt and meeting working capital requirements to revive stalled projects and start new ones. It has come as a big breather for construction companies, reflected in the immediate spurt in their stock prices. The positive impact can be gauged from the fact that big construction companies like HCC will be able to reduce their debt by half as revealed by its Chairman Ajit Gulabchand.
Industry experts like Sushil Mittal, Chairman of the Association of Certified Realtors of India, are also upbeat about the policy decision, saying that it is a win-win situation for infrastructure companies, financial institutions and the government.
The new policy measures are perfectly in line with the government’s policy to push infrastructure and boost economic activity. As private investments are not forthcoming, the government is banking on public investment, with a spending target of Rs 7 lakh crore. Even in the national budget, the focus has been on infrastructure, as the total value of stalled projects stood at seven percent of GDP.
The Centre for Monitoring Indian Economy (CMIE) put stalled projects at Rs 11.36 lakh crore, with projects worth Rs 70,000 crore under arbitration. The government has an uphill task ahead to build 100 smart cities and 60 million new houses under its flagship “Housing for All” programme. And the key to achieving all this is the good financial health of the construction and realty sector.
Anuj Puri, Chairman of global real estate advisory JLL India, believes that at a time when we are focusing on infrastructure creation and real estate boosting, the government’s twin measures of providing continuous liquidity and switching over to the globally accepted EPC (Engineering, Procurement, Construction) mode of contracts, promising higher degree of certainty in relation to cost and time, will result in infrastructure capacity-building by giving a fillip to private participation and investment.
Today, the biggest bane of the construction and realty sector is debt-ridden developers. That’s why the whole focus of the new policy is to de-stress the developers while at the same time helping financial institutions to recover their loans on time to control bad debts so that they are in a position to not only restructure loans of stressed players but also offer them loans for new projects.
Industry statistics show that banks have an exposure of about 45 percent to the construction sector. The total loan outstanding of the real estate sector is Rs 9.60 lakh crore with 1.6 percent bad loans, amounting to Rs 16,000 crore. According to the premier rating agency, Crisil, the debt of real estate developers for residential projects shot up to Rs 61,000 crore in 2014-15. It estimates that top real estate companies face the challenge of paying about Rs 30,000 crore of borrowings maturing in the immediate future.
It is in this backdrop that private equity entities have come to the rescue of developers of stressed projects. Piramal has recently funded Rs 15,000 crore to over half a dozen developers and has a target of disbursing Rs 1,500 crore of credit to realty companies every month. Big global private equities like KKR, Blackstone and Altico are also extending credit to stressed developers to finish stalled projects. That’s also the reason why the Department of Financial Services under the Finance Ministry, and the Reserve Bank of India (RBI), have announced the need for a one-time scheme to address stressed bank loans in the real estate sector.
The new policy prescription also opens up opportunities for realty companies and developers to partner with construction companies and contractors to take up infrastructure projects like roads and highways. In a recent conference of Naredco (National Council of Real Estate Developers), Road Transport and Highways Minister Nitin Gadkari had also suggested that real estate developers facing a slowdown should leverage massive opportunities of undertaking roads and highways projects by partnering with established infrastructure players.
In conclusion, the government’s new progressive policy has a healthy prescription of short-term to long-term measures to revive the construction sector, especially as, going forward, it also seeks to bring changes in the bid documents and propose model contracts, besides focusing on greater conciliation to boost the sector.
(Vinod Behl is the editor of Realty Plus, a leading real estate monthly. The views are strictly personal.)