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“Breaking the Barriers- Reinvigorating Real Estate Finance in India”

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RICS- promotes and enforces the highest professional qualifications and standards in land, real estate, construction and infrastructure and NAREDCO- an apex real estate body which works under Ministry of Housing & Urban Affairs have released a joint report titled“Breaking the Barriers – Reinvigorating Real Estate Finance in India”. The report outlines a way ahead to create a robust real estate financial system, which is very much needed, given the current concerns and challenges in the sector. The report has been released on the sidelines of the 1stNational RERA Conclave organised by the UP RERA in Lucknow,

The onset of regulations and reforms introduced from 2016 onwards, ‘brought out the skeletons’ in the sector, leading to an environment of mistrust amongst 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 the Government’s monetary policy, fiscal tools and macroprudential measures, in order to handle the crisis.

According to the report, solutions need to be categorized in accordance with the severity of the problem. The good news is, that 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.

According to the report, there are several challenges that the sector is currently grappling with that need attention. These include:

  • A consumption crisis where customer sentiment is being driven by a 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 need to create a sustainable financing system on the back of robust regulation and an implementing infrastructure”says Nimish Gupta FRICS – MD, South Asia RICS, who has researched and authored this report.He further adds “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 categorized in accordance with the severity of the crisis.”

“The market is gradually gaining traction in terms of renewed consumer confidence. As a result of a series of reforms, both commercial and residential real estate in the country have shown promising trends in the past year. While there has been a good supply of office space, residential has seen a drop in new supply. However, the demand for both spaces remains robust. The disruptions of the past in the form of demonetisation, implementation of RERA and GST, and the recent NFBC crisis continue to pose challenges before the stakeholders. Overall, the market now focuses on the delivery of projects – a reason, we will witness more and more supply in coming quarters across key micro-markets. This will augur well for homebuyers.” says Mr Parveen Jain, Vice Chairman, NAREDCO.

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 are taken for risk management including credit & 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 in 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 & Bonds; Rental Housing Finance; Housing Micro Finance & 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.

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