ARCs To See 500-700Bps Higher Recoveries from Residential Realty: CRISIL
Moneylife Digital Team 10 June 2024
Following specific amendments in the Insolvency and Bankruptcy Code (IBC) for real estate projects to aid resolutions, asset reconstruction companies (ARCs) are set to see an increase in the cumulative recovery rate for stressed residential real estate projects by 500-700bps (basis points) to 16%-18% as of March 2025 from 11% as of 31 March 2024, says a research note.
In the report, CRISIL Ratings says the recoveries will be driven by improved viability of stressed projects due to healthy demand and price appreciation seen in residential real estate and greater investor and promoter interest in reviving such projects. At the same time, it says that recent amendments to the Insolvency and Bankruptcy Board of India (IBBI) regulations for real estate projects should also strengthen the resolution of stressed real estate assets in the medium term. 
An analysis of the CRISIL Ratings security receipts (SRs) portfolio, comprising about 70 stressed real estate projects, with a saleable area of around 66mn (million) square feet (mn sq ft) with outstanding SRs of nearly Rs9,000 crore, indicates as much. 
About three-fourths of the projects analysed turned into non-performing assets (NPA) between 2019 and 2022 and were impacted by falling sales and slower collections during the Covid-19 pandemic. The remaining are pre-2019 NPA projects that faced liquidity issues due to weak demand, the report says.
According to Mohit Makhija, senior director at CRISIL Ratings, stressed realty projects are becoming viable for last-mile funding as about 33 mn sq ft of unsold inventory for projects analysed is likely to be sold at appreciated market prices because of a significant increase in prices over the last two fiscals and healthy demand for residential real estate. "Also, the emergence of distressed asset credit funds is expected to improve the accessibility of last-mile funding for project completion, supporting faster restructuring of debt by promoters with ARCs."  
The rating agency sees healthy economic growth and buoyant residential demand across housing segments in the top six cities to lead to 10%-12% growth in residential realty demand this fiscal. Low unsold inventories across major micro markets will also help ARCs turn around stressed real estate projects faster with support from promoters or external investors, it added.
In the CRISIL Ratings SR portfolio, around 40% of the stressed projects are expected to get last-mile funding from external investors and the balance will be through joint venture agreements and development management models entered into by promoters. 
Also, the amendments in the IBBI regulations specific to the real estate sector made in February 2024 are likely to fast-track the resolution of stressed real estate projects through IBC for ARCs in the medium term, the rating agency says, adding, "These amendments enable resolution of individual projects by delinking them from the entire corporate entity involving multiple projects and group inter-linkages." 
According to the research note, these amendments were essential, considering the slow pace of admission and resolution of cases under IBC observed in the past. It says, only 8% of the admitted cases have been resolved under IBC and debt worth around Rs40,000 crore was stuck across 100 ongoing realty cases for more than 2.65 years (see chart below). 
Sushant Sarode, director at CRISIL Ratings, says, "With improved flexibility for lenders to separate good projects from stressed ones, more project-specific resolutions are expected to get admitted in the IBC. We believe streamlining the process for effective implementation of the amendments will go a long way in strengthening the code for real estate sector cases through speedy resolution of ongoing and future cases to achieve value maximisation for all stakeholders." 
"Going forward, effective implementation of the recent amendments, resulting in faster resolution for national company law tribunal (NCLT) cases, will bear watching," the rating agency says.
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