Real Estate and infrastructure are the major drivers of the economy with their significant contribution to the country’s GDP. As such, the construction finance is critical to ensure that real estate and infrastructure development face no hurdles.
The Real Estate sector is expected to reach $1 trillion in market size by 2030, up from $200 billion in 2021. It will contribute 10% to the country’s GDP by 2025 and 13% by 2030, against the current GDP contribution of 7%. The Construction sector that employs over 30 million people and creates assets worth over $200 billion, contributes more than 5% to the nation’s GDP and 78% to gross capital formation. With India’s urban population rising to 42% of the overall population by 2030, the housing sector alone needs more than $100 billion of investment over the next 7-10 years. With demand from other asset classes including office, warehousing, retail and hospitality, the total requirement is almost $130 billion. The country’s infrastructure sector needs $1.4 trillion of funding for infrastructure during 2020-25 to ensure that India becomes a 5 trillion economy.
In view of this massive funding requirement of the construction sector, there is a need for a robust financing ecosystem, supported by enabling policy initiatives. The banks provide the largest (37%) share of the construction finance followed by HFCs at 34% and NBFCs at 16% and the remaining 13% is covered by trusteeship. The overall contribution of NBFCs, HFCs, and trusteeship accounts for 63%. Over the past several years, the government has undertaken several reforms and positive policy initiatives to meet the construction finance requirements, but despite this promising support, the road ahead has many challenges to surmount.
Bank credit for construction finance remains a challenge. It is not just restrictive but also costlier for the small and medium real estate companies. However, over the past few years, several policy measures have been taken to improve construction finance, including re-finance schemes for construction finance for affordable housing by the National Housing Bank (NHB). The government has created a ₹10,000 crore Affordable Housing Fund under NHB, using priority sector lending shortfalls of banks and financial institutions for micro financing of HFCs. Besides, there has been some relaxation in the ECB framework by RBI to allow developers to raise funds for low cost and affordable housing projects and slum rehabilitation projects as part of the country’s infrastructure sector.
A spate of reforms including RERA to regulate the real estate sector, making it more organized and transparent, has helped boost sourcing of foreign funding. Today, construction is the third largest sector in terms of FDI. In the first half of 2021, India registered investments worth $2.4 billion into real estate assets - a 52% yoy growth. FDI in the real estate sector (including construction development activities) stood at $51.5 billion between April 2000 and June 2021. Greater transparency adopted by real estate developers with regard to accounting and management systems to meet due diligence standards of foreign investors, will further boost foreign funding in the coming years.
Reforms have opened up alternate financing routes for the construction sector. India Inc. mopped up $14.2 billion via overseas bonds in 2021. Alternate Investment Funds (AIFs) have emerged as another construction financing option. The government’s ₹25,000 crore SWAMIH AIF is a major initiative to provide construction finance for completing lakhs of unfinished and stalled homes across India. This government fund has triggered private sector AIFS. More recently, in April 2021, HDFC Capital Advisors partnered with Cerberus Capital Management to create a platform that will focus on high yield opportunities in residential real estate by purchasing inventory and providing last-mile funding for under-construction residential projects across the country.
The funding scope has been further enlarged with real estate and infrastructure trusts (REITs and INVITs). In a major reform push, in July 2021, SEBI lowered the minimum application value of REITS from ₹50,000 to ₹10,000-15,000 to invite more investments from small and retail investors. According to ICRA estimates, assets worth over ₹1 trillion in real estate space are likely to be listed in near to medium term while another set of assets worth over ₹2.5 trillion are expected to be monetized through InvITs. High potential niche real estate segments like logistics, warehousing, and data centers have already opened up large funding avenues. Global PE major Blackstone has just set up a $900 million logistics platform for India.
Further, the debt serviceability of companies has considerably improved and they have deleveraged their balance sheets to maintain good financial health. Deleveraging has helped companies to cut debt. According to ICICI Sec, listed realty companies have successfully shed 37% of debt, totalling ₹27,400 cr between Q4FY20 and Q1FY22. According to Anarock Consultants, $67 billion or 67% of total loan advances of $100 billion (about 7.44 lakh crore) to the real estate sector is completely stress-free, while another 15% (₹1.12 lakh crore) is under marginal pressure. About 75% of total lending of $73 billion (₹5.43 lakh crore) to Grade A is safe and under no stress. India Inc’s debt-equity ratio has fallen to a 6-year low, from 0.73 in FY20 to 0.59 in FY21.What is even more significant is that even small and medium companies have been able to shed debt and deleverage their balance sheets. Amidst their improving credit profiles, the companies can now look forward to more corporate lending.
On the infrastructure front too, the challenge is to meet $1.4 trillion funding needs from 2020-25 so that lack of infrastructure development does not pose a major hurdle in the economic growth to support the $5 trillion economy. The National Infrastructure Pipeline (NIP) envisaging an investment of ₹111 lakh crore between FY2020 and FY2025, will help meet most of this funding requirement. Further, the National Monetization Plan (NMP) will free capital using brownfield assets. Moreover, ahead of the budget, in a big boost to the construction firms, the Finance Ministry has directed central government entities to release 75% of disputed amount (about ₹50,000 crore) under litigation in cases where arbitrators have decided in favour of contractors, but where the government agencies have moved appellate tribunals. Along with this, the Road Ministry has taken steps to boost developers’ liquidity.
Notwithstanding all the reforms and policy initiatives, a lot more needs to be done on the construction finance front, and the stakeholders have set their eyes on the budget. According to Jayant Sinha, Chairperson, Parliamentary Standing Committee for Finance, the private sector needs to play a stronger role in terms of powering credit flow. The financial lending landscape should be transformed by strengthening NBFCs. Adds Ramesh Iyer, Chairman, Assocham National Council for NBFCs and Infra Financing, “NBFCs have bounced back from various challenges and disruptions in the past because of their strong business model. As a growing industry, NBFCs look forward to more support that would strengthen the industry and overall growth.”
Ashwinder R Singh, CEO-Residential Bhartiya Urban, calls for boosting private investment into construction. “Let 2022 signal reinstatement of the private sector interest in the infra sector by restructuring the PPP models to streamline the risk and reward distribution amongst different stakeholders and create suitable and efficient dispute resolution mechanisms. The budget should announce a broad national PPP policy formulating the aim, scope and execution standards.” He also suggests that banks should finance the construction and the initial operation period of the construction project with protection and pension funds giving refinancing of bank credits over a long period. This would address the issue of asset liability bungles faced by the banks.
Kumar V Pratap, Senior Economic Advisor to the central government calls for easing infra funding in FY 23 budget through a dedicated Credit Enhancement Agency to enable more bond financing and institutional financing of infrastructure. Adds Ramesh Nair, CEO India & MD - Market Development Asia, Colliers, “As more and more investors, occupiers and developers are on board with the idea of sustainable development, green bonds will become a part of the funding mechanism and the market will move towards maturity with more investor participation.”