Decoding the Indian Residential Real Estate Turmoil and Proposing solutions

Briefly outlining the resolution plan passed by the Apex court of the two most prominent and large real estate companies Jaypee & Unitech, it is my endeavor to suggest

solutions to the crises that hit the Indian Real Estate market.

While home buyers and borrowers unanimously (over 97 percent) voted for NBCC Ltd to take over bankrupt, Jaypee Infratech, effectively a residential real estate company. The

NBCC Ltd., a company from the Government of India, will now build the residences, pay off the borrowers and hand over the apartments to home buyers over the next four years. It may however be noted that during the resolution process, Jaypee was able to deliver more than 6000 apartments to home buyers.

The management under the Resolution professional was able to focus on delivery. In the matter of Unitech Limited, after years of protracted litigation in various forums, the

The Apex court of the country ordered that the Government of India takes over the company by appointing its own board of directors. It is expected that the new board, which is headed by a seasoned retired IAS officer and has renowned bankers and developers will now work toward the completion of the stalled projects.

From 2003-2013, in most urban markets in India, reports of residential plot prices doubling every three-four years and residential houses/apartments yielding 20-30% annual returns were very typical. The bull market allowed all sorts of people to

purchase and book properties, houses, and apartments using their own money,

investing funds from banks/NBFCs and others, leveraging greed and black-market

revenues and diverting funds from other legitimate businesses.

Even for large projects, real estate companies could collect most of the funds needed for

project funding from homebuyers against their bookings and the Banks /

Non-Banks. The land is being bought at whatever prices are available, and houses and flats are sold, many times in “pre-launch roadshows” even when the land was not

in physical possession and without the right title. 

Hundreds of little ‘workers’

went into the field. Several major real estate developers have pursued hundreds

of ventures across India with small and weak structures with low equity funding

and strong loan financing leveraging. Most importantly no management bandwidth

or experience to handle such a scale of business. 

Demonetization dealt a final blow. This took away the positive demand’s main trigger. The residential real estate sector practically went insolvent in 2017, stripped of

the prospect of huge capital profits and the loss of funding from unaccounted

assets.

IBBI’s insolvency

and bankruptcy newsletter notes that by the end of September 2019 there were

115 real estate firms under the Corporate Insolvency Resolution Process (CIRP).

However so far, no resolution with noticeable material significance has emerged

out of the process.

Some key issues: 

Currently, the customers are forum shopping for more favorable outcomes across the three forums RERA, consumer courts like NCDRC, and NCLT. However, none of these can

address the liquidity issue which will hamper and prevent the execution of any

orders from these courts. Ultimately these can only lead to personal liability

and the arrest of the promoter in question, however, after some psychological win

the issue of delivery of homes will persist. 

The homebuyers

enjoy the status of Financial Creditor alongside debt providers like

Banks/NBFC to the project. However, it has been noticed in most cases

that the expectation of the buyer is that the lending institutions should take

a haircut however the customers should be paid delay compensation. This makes

the projects totally unviable despite the total erosion of promoter equity and even

the publicized SWAMHI stress fund set up by Govt Of India is not willing to fund

such projects.

Developers spent

past decade running around various approval agencies and for the past two years

have become legal experts spending all their energy running around all the

forums like NCDRC, NCLT, RERA, and other district courts and police. All this

needs to come to a halt and developers need to be made to focus on delivery and

not live under the fear of the unknown. 

So, in terms of resolution, it’s a question of a haircut amongst promoter companies, and financial institutions, delay compensation for customers, and dues to the government

authorities. The following measures will achieve the desired results. It is a given that when the market conditions are adverse, stakeholders must book losses to exit.

The solutions are quite simple. They are based on the reforms which are detailed below:

That Government needs to take initiative to amend laws and streamline the process or else people will have multiple rights with no outcome. While the government has done great by implementing laws like IBC etc but for real estate has come up with RERA,

it needs to provide the sectoral regulator with teeth. The real estate industry would have to be completely restructured, however potentially insolvent owners, unlike their peers in other industries cannot be removed as it will open a pandora’s box on every project due to the complexity of the business. The companies should be run under an administrator setup appointed by a court the process with the existing promoter & management reporting to the administrator.

Firstly, the RERA act should be amended to have the requisite provisions specifically from COPRA and IBC which are relevant for real estate. Since all projects are under the

monitoring of their respective RERA bodies, it should be the only forum for

initial complaints and grievances. The lenders’ interest should follow the customer thus giving priority to the delivery of homes.

Secondly, any project which fails to meet the project timelines for three quarters consecutively should be brought under the control of the respective RERA body. The body should appoint an administrator who would work along with the existing promoter and management to develop a resolution plan. The selection of the administrator should be from the IAS cadre to ensure he has enough administrative experience and is able to handle the various government departments on which the project is dependent.

Thirdly, RERA act must be amended to invoke a moratorium once an administrator has been appointed to a company. The moratorium has the effect of pausing all proceedings and legal processes that are being taken against the company in question. It also means

no other legal processes can be commenced without the consent of the administrator or permission of the court. All promoters cannot be accused of wrongdoings and only in exceptional cases where there is prima facie evidence of fraud, the respective RERA body should lodge an FIR to be investigated by a competent investigating agency like EOW or ED as the case may be. In such cases, the administrator should work with the management of the company for resolution.
 

Fourth, once the resolution plan has been formulated the execution of the same should happen through a customer-monitored process. It is significant to involve the customers in the execution as without their buy-in on any plan the project will never complete. This will also take care of the nuisance of investors who have bought homes but

are not interested in taking possession due to lower resale prices.

Finally, once the projects are completed and handed over, the administrator should exit, and company management should be handed over back to the promoter or the management as the case maybe. This will create an incentive for the promoter/management to expedite the resolution and subsequent handing over of the homes.   

A fundamental restructuring of the residential real estate business is the need for the day and if this is done, the economy would see a higher path of growth again and people could get possession of their homes.

Vineet Relia

Managing Partner

Relia Management Services LLP

(previously MD Sare Homes)