June 10, 2024: Asset reconstruction companies (ARCs) are expected to witness an increase in the cumulative recovery rate for stressed residential real estate projects by 500-700 bps to 16-18% as on March 31, 2025 (see chart 1 in annexure), from 11% as on March 31, 2024, according to a report by CRISIL ratings.
This will be driven by improved viability of stressed projects due to healthy demand and price appreciation seen in residential real estate and greater investor and promoter interest in reviving such projects. At the same time, recent amendments to the Insolvency and Bankruptcy Board of India (IBBI) regulations for real estate projects should also strengthen the resolution of stressed real estate assets in the medium term.
An analysis of the CRISIL Ratings security receipts (SRs) portfolio, comprising around 70 stressed real estate projects (saleable area of around 66 msf) with outstanding SRs of around Rs 9,000 crore, indicates as much.
The report mentioned that healthy economic growth and buoyant residential demand across housing segments in the top six cities will lead to 10-12% growth in residential realty demand this fiscal. Low unsold inventories across major micro markets will also help ARCs turn around stressed real estate projects faster with support from promoters or external investors.
About three-fourths of the projects analysed turned into non-performing assets (NPA) between 2019 and 2022 and were impacted by falling sales and slower collections during the Covid-19 pandemic. The remaining are pre-2019 NPA projects that faced liquidity issues due to weak demand.
Mohit Makhija, senior director, CRISIL Ratings, said, “Stressed realty projects are becoming viable for last-mile funding as about 33 msf of unsold inventory for projects analysed is likely to be sold at appreciated market prices because of a significant increase in prices over the last two fiscals and healthy demand for residential real estate. Also, the emergence of distressed asset credit funds is expected to improve the accessibility of last-mile funding for project completion, supporting faster restructuring of debt by promoters with ARCs.”
This is reflected in the CRISIL Ratings SR portfolio, wherein 40% of the stressed projects are expected to get last-mile funding from external investors and the balance will be through joint venture agreements and development management model entered into by promoters.
Also, the amendments in the IBBI regulations specific to real estate sector made in February 2024 are likely to fast track resolution of stressed real estate projects through Insolvency and Bankruptcy Code (IBC) for ARCs in the medium term. These amendments enable resolution of individual projects by delinking them from the entire corporate entity involving multiple projects and group inter-linkages.
These amendments were essential, considering the slow pace of admission and resolution of cases under IBC observed in the past. Only 8% of the admitted cases have been resolved under IBC and debt worth around Rs 40,000 crore was stuck across 100 ongoing realty cases for more than 2.65 years (see chart 2 in annexure).
Sushant Sarode, director, CRISIL Ratings, said, “With improved flexibility for lenders to separate good projects from stressed ones, more project-specific resolutions are expected to get admitted in the IBC. We believe streamlining the process for effective implementation of the amendments will go a long way in strengthening the code for real estate sector cases through speedy resolution of ongoing and future cases to achieve value maximisation for all stakeholders.”
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
