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Press release

3 NOV 2019

Report outlines solutions to reinvigorate finance in real estate

Today, at the first National RERA Conclave, organised by the UP RERA in Lucknow, RICS and NAREDCO released a report titled 'Breaking the Barriers — Reinvigorating Real Estate Finance in India'. The report outlines a way to create a robust real estate financial system, which is very much needed, given the current concerns and challenges in the sector.

The onset of regulations and reforms introduced from 2016 onwards "brought out the skeletons" in the sector, leading to an environment of mistrust among customers, thereby fuelling a consumption crisis, as well as a financial crisis. While the commercial, retail, hospitality and industrial segments are growing, residential markets have taken a beating. Therefore, there is a need for immediate intervention through government's monetary policy, fiscal tools and macroprudential measures, in order to handle the crisis.

According to the report, solutions must be categorised in accordance with the severity of the problem. The good news is that a majority of the problem-projects can be managed through key collaborative actions between the government, authorities, financers, developers and customers, while others will require larger measures for resolution.

The report also lists several challenges that the sector is currently grappling with that need attention. These include:

  • A consumption crisis where customer sentiment is being driven by lack of trust and confidence in the market and stakeholders.
  • NPAs and write-offs being at an all-time high.
  • Declining capital adequacy ratio.
  • Lack of skills and professionalism in the construction and BFSI sectors.
  • RERA lacking the "teeth" to perform effectively as a not just a regulator, but also aide in the development of the sector.
  • A highly litigious market emerging, where false and avoidable claims are also being brought to the fore and adding unnecessary pressure on the judiciary, regulators and conciliatory forums.

The regulatory and judicial process and procedures have been undergoing a considerable change over the course of the last few years. This to a large extent has impacted capital and investment flows to the realty market, at times adding further pressure on an already constrained market. We must create a sustainable financing system on the back of robust regulation and an implementing infrastructure — there is no 'one' solution that fits all. To ensure we handle the crisis effectively and efficiently, it is imperative that the affected projects are categorised in accordance with the severity of the crisis.

Nimish Gupta FRICS, Managing Director of South Asia, RICS
Report author and researcher

The report lists certain key parameters as a way forward in creating a robust real estate financial system. These include:

  • Credible property appraisals and valuations being undertaken in accordance with International Valuation Standards (IVS) and carried out by chartered / qualified valuers as per approved methods.
  • Adequate measures be taken for risk management including credit and collateral risk assessment, analysis, and mitigation evaluation basis credit information and transparency.
  • Identify and use mortgage-related securities to fund housing. Mortgage securities improve housing affordability, fund flows to the housing sector, better risk allocation, help tap new funds for housing, resulting into reduced risk and risk premiums.
  • Scale-up skills and capabilities in the BFSI sector with respect to real estate and project management.
  • Embrace and adopt the use of technology for data storage, analysis, appraisal and credit scoring.
  • Evolve the BFSI sector by embracing new / alternative sources of funding in order to create greater transparency and participation of wider sources of capital (mortgage securities and bonds, rental Housing Finance, housing micro-finance and finance subsidiaries, contractual savings schemes for housing, housing provident funds, troubled asset relief programme in the form of revolving funds, and external commercial borrowings for troubled assets).
  • Professionalising the sector — entry barriers for qualified stakeholders; employing third party project administrators.
  • Policies and regulations to support lower strata financing.

The report further details resolutions to overcome the financing crisis, by looking specifically at each "problem-project category" be it in the red, orange, yellow or green categories. The resolutions are extended both with respect to policy matters, as well as regulatory matters, and in some cases provide some unique solutions to the current financing crisis.