ARCs to see 500-700 bps improvement in cumulative recovery rate for stressed residential real estate projects: CRISIL Ratings

June 10, 2024

Asset reconstruction companies (ARCs) are set to see a 500-700 basis points (bps) increase in the cumulative recovery rate for stressed residential real estate projects to 16-18 per cent as on March 31, 2025, from 11 per cent as on March 31, 2024, according to CRISIL Ratings.

The improvement in the cumulative recovery rate (ratio of cumulative gross recoveries to cumulative SRs issued) 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, according to the agency’s analysis.

At the same time, recent amendments to the Insolvency and Bankruptcy Board of India (IBBI)‘s regulations for real estate projects should also strengthen resolution of stressed real estate assets in the medium term.

ARCs acquire stressed loans from financial institutions at a haircut and issue security receipts (SRs)

An analysis of CRISIL Ratings security receipts (SRs) portfolio, comprising 70 stressed real estate projects (saleable area of 66 million square feet/ mn sq ft) with outstanding SRs of ₹9,000 crore, indicates as much.

CRISIL Ratings assessed that healthy economic growth and buoyant residential demand across housing segments in the top six cities will lead to a 10-12 per cent 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.

The agency noted that 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 collection during the Covid-19 pandemic. The remaining are pre-2019 NPA projects that faced liquidity issues due to weak demand.

Mohit Makhija, Senior Director, CRISIL Ratings, said: “Stressed realty projects are becoming viable for last mile funding as 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.”

This is reflected in the CRISIL Ratings SR portfolio, wherein 40 per cent of the stressed projects are expected to get last-mile funding from external investors and the balance will be through joint venture agreements and the development management model entered into by promoters.

Also, amendments in the IBBI regulations specific to the real estate sector made in February 2024 are likely to fast-track resolution of stressed real estate projects through the Insolvency and Bankruptcy Code (IBC) for ARCs in the medium term.

These amendments enable resolution of individual projects by delinking them from the entire corporate entity involving multiple projects and group inter-linkages.

These amendments were essential, considering the slow pace of admission and resolution of cases under IBC observed in the past, CRISIL Ratings said.

Only 8 per cent of the admitted cases have been resolved under IBC and debt worth ₹40,000 crore was stuck across 100 ongoing realty cases for more than 2.65 years, it added.

Sushant Sarode, Director, CRISIL Ratings, said: “With improved flexibility for lenders to separate good projects from stressed ones, more project-specific resolutions are expected to be admitted in the IBC.

“We believe streamlining the process for effective implementation of 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 recent amendments, resulting in faster resolution for National Company Law Tribunal cases, will bear watching.

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