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Real Estate

India's real estate fund could prove too little, too late to revive demand

Many analysts say the fund won't solve sector's problems as quantum is inadequate

High-rise residential buildings are seen in this cityscape of Mumbai.   © Reuters

MUMBAI (NewsRise) -- India's plan to set up a fund to complete stalled housing projects may be too little, too late to boost demand in the cash-strapped residential market reeling under weak consumer sentiment and slowing investments.

On Saturday, the government said a fund worth 100 billion rupees ($1.41 billion) will be available to complete unfinished lower-and middle-income housing projects, while a similar amount will come in from private investors or state-owned investment companies. However, the funds are not available for projects that are deemed nonperforming or into bankruptcy proceedings.

The government's move comes as the industry grappled with tighter liquidity conditions that sapped the availability of credit in the once-buoyant Asia's third-largest economy. India's gross domestic product expanded at the slowest pace in almost six years between April and June.

The liquidity crisis dealt a double whammy to the housing market that has been battered by weak sales, mounting inventory, and stagnant-to-falling prices. Most analysts say the government's measures may not solve the problems of the sector, as the quantum of funds is insufficient.

According to the government, construction has stalled due to insufficient funds at around 350,000 dwelling units that come under the specified eligibility criteria. "The stressed asset fund may at best fund around 25% of the stalled projects, that too, over a period of time," said brokerage Jefferies.

Further, since the beginning of this year, the number of real estate cases under bankruptcy proceedings rose to 257, about twice from the previous year's level. This is feared to worsen in the next six to 12 months as the stress intensifies, rendering many of the projects ineligible even before the fund is set up.

"Speed is important," said Morgan Stanley, warning that the pace of delinquencies could increase with the economy slowing.

Investors were expecting a booster from the government that would help kick start the sagging demand by reducing purchase cost through tax incentives for premium segment of housing, or address concerns on all the stressed projects that have been stranded for lack of funding.

Shares of real estate companies such as DLF fell 2.7%, while that of Prestige Estates Projects lost 3.3% and Oberoi Realty dropped 1.4% in Mumbai trading on Monday. The benchmark S & P BSE Sensex closed down 0.7%.

Even as the housing market struggled to expand, the commercial real estate segment in the country boomed. Commercial real estate is benefiting from the surge in demand for office spaces as multinational companies seek to tap into the country's large talent pool and cost advantages.

According to CLSA, the absorption levels, measured in terms of the available office space sold, surged more than 25% in the first half of this year, boosted by IT sector hiring and coworking spaces. Rents are up over 10%.

--Dhanya Ann Thoppil

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