Real Estate’s State!

The number of Real Estate firms entering Bankruptcy proceedings have more than doubled this year to a total of 421 by the end of June itself. This slowdown has mainly been triggered by the fall of IL&FS, one of the leading NBFC’s (Non – Baking Finance Companies) in the country (at that time), an event which is often termed as India’s Mini – Lehman Moment.

The Government had seized control of IL&FS back in September 2018, which had then set off a liquidity and credit crunch for small financiers and property firms, which depend on NBFC’s for credit. The credit crunch faced by India’s Shadow Banking sector has gravely affected the Cash Flows of Real Estate Firms who are struggling to pay their Interest dues.

The Real Estate firms had relied on the loans from the then prospering Shadow Banking Sector to incite a Five year property boom which came to a halt with the collapse of IL&FS last year.

The Bankruptcies arise as India’s key Real Estate Firms struggle to deliver their commitments and projects on time. These delays have led to the Homebuyers losing faith in most of the Under Construction Projects with HDIL being the latest Real Estate Firm to enter Bankruptcy proceedings.

The Indian Supreme Court upheld the ability of homebuyers to drag property developers into bankruptcy proceedings as several real estate firms are going bust in Asia’s third-largest economy. The court upheld that Homebuyers have the ability to drag Read Estate Firms before regulatory authorities, as well as bankruptcy courts. The apex court also said that in case of conflicts with other laws, provisions of Insolvency and Bankruptcy Code (IBC) will prevail.

With Stalled Housing Projects rising to $65 Billion by the end of April, 2019 itself, India’s Real Estate Market is witnessing a severe Liquidity Crunch that could’ve been avoided by bailing out IL&FS. Many on the street believe that the IL&FS situation, could’ve been handled better by the Government and the liquidity crisis, which the Shadow Banks are currently facing, wouldn’t have triggered.

An analysis of about 11,000 home builders by research firm Liases Foras in February showed that developers on average have to repay twice as much in debt each year as the income they generate that can be used to service it. This comes as property prices in India’s biggest cities are flagging — home values in Mumbai sank 11 percent last year following a 5 percent decline in 2017. They ran up 32 percent in the four years through 2016.

Builders’ debt repayments amount to $18.5 billion each year, the Liases Foras data show. On top of that, some lenders have sharply increased the interest rates they charge developers for new loans. Real Estate firms make up for the largest number of cases under the IBC.

The situation of HomeBuyer’s has also worsened in the country lately with a number of Proprietors filing for Bankruptcy after being unable to deliver their projects on time and collapsing under huge piles of debt. Having been put on the backfoot by the withdrawl of High Denomination Notes and the New reforms of Taxes introduced in the following year, HomeBuyers are the ones affected the most.

Buyers are now themselves taking over the stalled projects and completing them themselves, although the lenders have to face a haircut on all their loans to Bankrupt Real Estate Firms, Vinay Sah, the managing director of LIC Housing Finance, which has also had to take a haircut on its loan. “It would be a win-win situation for all stakeholders concerned, which Mr. Vinay Sah, the MD of LIC Housing Finance, feels would be a win-win situation for all stakeholders concerned.

How will the Sector bounce back from this crisis is yet to be seen.