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ICRA Warns Funding Sources And Adequacy Problems

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ICRA Warns Funding Sources And Adequacy Problems

As the government proposed fund for the last-mile financing of stalled projects, ICRA indicates challenges like sources of funding.

The government’s proposed creation of Rs 20,000 crore fund for the last-mile financing of stalled affordable and mid-segment housing projects is likely to face challenges of sources and adequacy, said rating agency ICRA.

In the backdrop of the weak performance of residential real estate sector, as well as the acute housing shortage currently prevalent, especially for the economically weaker sections, the government on Saturday announced a further slew of measures.

These measures, including the creation of an Rs 20,000-crore fund for the last-mile funding of affordable and mid-segment housing projects, are part of the government’s recent initiatives to bolster the overall economy.

Most of these have achieved around 60 percent completion but lack cash flows for the balance 40 percent of their construction. The fund, which is proposed to be created as a Category-II AIF, would support projects which are net worth positive and have not been classified as an NPA or referred to as an NCLT.

“While the initiative provides a structured method of infusing liquidity into stuck projects, and thereby seeks to address the key issues of project funding, completion and delivery, the adequacy of the fund, as well as the establishment of funding sources, are issues which are expected to pose certain challenges in implementation,” said Mahi Agarwal, Assistant Vice President and Associate Head at ICRA.

As per Government estimates, around 3.5 lakh dwelling units would be eligible for funding support through this measure. Most actual constructed units, however, have largely been in the range of 80-110 square metres.

Considering this as the typical range for unit size, and assuming an average construction cost of around Rs 1,700 sq ft and 60 percent completion, the amount required for funding of the balance 40 percent of the project construction cost could spread over a range of around Rs 20,500 – 28,200 crores.

Thus, depending on the actual sizes of the individual dwelling units, the fund size of around Rs 20,000 crore may be sufficient to cover the construction cost for only a part of the eligible houses.

“While the Government is committed to providing Rs. 10,000-crore, the balance Rs. 10,000-crore is proposed to be funded by other investors, like the LIC, banks, sovereign funds, the development of financial institutions? (DFIs) etc. However, given the prevailing macro-economic weakness, both domestically and internationally, investor ability and appetite to contribute to the fund remains to be seen,” Agarwal added.

The establishment of adequate funding sources, together with an efficient and time-sensitive process, would go a long way in ensuring the overall efficacy of the fund, and enable the Government to achieve its twin objectives of giving a much-needed boost to the residential real estate sector, as well as providing Housing for All by 2022, ICRA added.

The additional measures like relaxation in ECB guidelines for the financing of homebuyers under the PMAY, and reduction of interest charged on housing building advance through linkage to 10-year G-Sec yields, are also expected to provide some stimulus for the sector.

Source: ETRealty

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