How NHB directive on subvention schemes will impact residential real estate sector

Time and again, residential real estate in India has been highlighted as a high-growth market - and for good reasons. Despite the adverse impact of large-scale policy reforms such as demonetisation of high-value currency notes and the implementation of goods and services tax, the sector is poised to grow robustly over the next decade. Progressive government policies, such as Housing For All and the creation of Real Estate Investment Trusts (REITs), are expected to play a major role in driving this growth. IBEF estimates that these measures will drive an increase in the quantum of foreign direct investment in real estate, creating an opportunity worth $19.65 billion in the Indian market.

However, it is not a smooth sailing for players in the residential real estate sector. The 2018 NBFC crisis, which involved major financial corporations such as IL&FS and DHFL, has had the sector grappling with a massive liquidity crunch. The recent National Housing Board (NHB) directive regarding subvention schemes is expected to further aggravate this situation.

What is the NHB directive and how will it impact residential real estate?

The NHB directive advises housing finance companies to avoid extending loans to under-construction projects that are already using subvention schemes. It strictly prohibits lenders to avoid upfront disbursal of funds for such projects and instead link the payments to various stages of construction. Any deviation from the mandate will be viewed by the NHB as "dereliction of duty".

It is important because as part of subvention schemes, lenders used to disburse the entire remaining amount to developers post a down payment by customers (typically 5-10 per cent of the property value). Developers, would either pay equated monthly instalments (EMIs) until the customer took possession or for a specified duration of time. This gives them easier access to capital than conventional credit facilities, at the same time driving increased sales. Prima facie, the NHB directive makes it challenging for real estate developers when it comes to securing capital for new and under-construction projects.

This, however, looks less worrisome in comparison to the impact the directive will have on consumer activity in the space.

Real estate developers often use subvention schemes for under-construction projects to incentivise customers into making a purchase. The ultimate objective is to stimulate more transactions by reducing the financial burden on the end-customer.

These schemes have been quite successful in driving consumer activity in the sector. Industry experts estimate that these schemes are being utilised by around half of new residential projects launched in India, which currently account for 40 per cent of all residential real estate sales. The latest NHB directive will have a significant impact on these numbers, as buyers will no longer be able to avail the flexible payment option that these schemes represented. In a way, the buyer will end up paying both the rent on currently occupied house and EMIs for the new house, increasing his cash outflow.

However, the directive will introduce more transparency in subvention schemes. There were no inherent mechanisms in the subvention scheme to protect the buyer. They had no fallback when project development stalled or if the developer stopped making EMI payments. Since loans are approved in favour of buyers, they would be considered to be defaulting in case of any of the above situations. This made subvention schemes a double-edged sword for buyers.

By linking loan disbursements to project development, the NHB directive will address this challenge to a certain extent. It will make real estate developers more accountable towards the progress of their project construction and ensure that the financial risk for buyers is reduced. There is, however, a critical need for stronger mechanisms to protect buyer's interests. Industry stakeholders - including the government and regulatory bodies - also need to formulate policies and initiatives that can enable seamless access to affordable credit for property developers. Doing so will facilitate the growth of the residential real estate sector in India.

(The author is Co-Founder and CBO of NoBroker.com)

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