Government's resolve to uplift the economy with reforms is becoming more and more evident day by day. On Wednesday, Finance Minister Nirmala Sitharaman announced the setting up of an alternative investment fund (AIF) to boost the realty sector in India.
With an initial corpus of Rs. 10,000 crores injected by government, it is expected to be scaled up to Rs. 25,000 crores with additional lenders such as LIC and SBI on board. This move is expected to provide the much-awaited relief to developers with unfinished projects and ensure timely delivery of homes to buyers.
Right now there are too many issues affecting the realty sector such as credit crunch, substantial unsold inventories, unfinished projects and many builders turning bankrupt. While credit crunch means buyers are unable to get the required finance, unsold inventories mean lack of liquidity for developers.
Mumbai's skyline stands dotted with many tall buildings. However lurking amongst these tall buildings are many unfinished buildings, left languishing in the limbo for several years now.
It was more than eight years ago when, Suhas Jadhav, a resident of a chawl in Malad, a suburb of Mumbai signed up for a redevelopment plan along with over 800 residents of the area. Suhas was happy as this transition from a chawl to a building meant he and his family would no longer have to cope with rainwater flooding their home every rain season damaging the furniture and electronics in his house. It also meant getting rid of the accompanying fungus and mold on the walls, which was causing health problems for his children.
However, his dream turned into a nightmare as the builder filed for bankruptcy in 2015, and the project got stalled. From the past four years, the rent has stopped too.
Suhas is not alone. There are lacs of others who are facing the same issues across various cities in India. According to the finance ministry's estimate, there are more than 1,600 stalled housing projects consisting of 4.58 lakh housing units that need immediate help.
Realty booster will help to boost the economy
In the last few years, the real estate sector in India has taken a huge hit. Government's demonetization move in 2016 crippled the industry which took a further hit post the NBFC crisis in 2018, resulting in a massive liquidity crunch.
When a construction project gets stalled, it results in locking up funds. While on one side, it becomes an NPA for the financing company, on the other hand, it causes financial stress to the home buyers. At the same time, it means a lack of liquidity for the developer. By financing stalled projects and completing them, a large number of funds stuck in the project can be released for productive use in the economy.
A boost for the realty sector will also increase the consumption of cement, steel and paint, which are the most consumed materials in this sector. Being a labor-intensive industry, it will also increase the demand for construction workers.
Impact of realty boost on your investments
Government's support to the real estate by setting up an alternative investment fund will have a considerable multiplier impact on the economy as it will benefit many sectors that are related to the sector. Many businesses operating in real estate, housing finance, cement and steel industry are likely to gain significantly.
From an investor's point of view, it is essential to remember that not all businesses from the above will do well. There will be some performers and some outperformers too. To maximize your wealth creation, it is necessary to identify and invest in those businesses which will outperformer.