Bankruptcy Doubles In Real Estate Segment: Is This mini-Lehman Moment?


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    Number of real estate builders filing for insolvency has been on a sharp rise. Is this Indian real estate’s Lehman moment?

    Last week, the dedicated bankruptcy court NCLT initiated the insolvency proceedings against Mumbai-based real estate developer Lokhandwala Infrastructure. This was the second major city-based real estate developer after HDIL which has also been referred for the insolvency resolution process under the IBC.

    As per the data by the Insolvency and Bankruptcy Board of India, 2,162 cases of insolvency resolution have been filed by the end of June 2019, out of which as many as 421 have been against real estate firms and allied businesses, The Economic Times reported. Compared to 209 bankrupt developers reported by end of June 2018, the rise is definitely alarming.

    Out of 421, 164 developers are reported to have been resolved, withdrawn or the companies faced liquidation.

    Liquidity crunch in the real estate sector is undoubtedly all time high which is suffocating smaller financiers and property firms, which mostly depend on funds from shadow lenders. And worst part is that these numbers are expected to increase further.

    Post 2014 slump in real estate, weak Indian developers evidently found it difficult to complete apartments as well as meet their debt obligations amid the funding crisis.

    India’s banks are rapidly losing faith in the shadow financiers that lend to property builders. A year after the collapse of IL&FS Group, a specialist infrastructure financier, the crisis of confidence is getting worse. The crunch is further seeping into the overall current economic slowdown that is hitting Indians’ demand for goods and services.

    Furthermore, as per newer regulations and Supreme Court judgement, homeowners are also at par with other financial creditors by legislation. They are also able to put more pressure on the non-performing developers and start insolvency proceedings.

    Due to the overall negative sentiment in the residential real estate segment, prospective buyers have taken a backfoot. There is clearly no assurance that the builders will be able to complete and sell the housing units.

    Amid the slowdown, demand for premium housing has collapsed; shantytown rehabilitation got stuck in a compliance and clearance quagmire, and nobody bothered to fix the broken plumbing, that is the regulator looked the other way even as the fund managers kept collecting fees.

    The $ 1.4 billion last-mile funding that the government proposed to finance completion of middle income and affordable housing units is more or less is like a drop in the ocean. money won’t be available to builders whose debt has already been marked down by banks as nonperforming or those that are facing insolvency proceedings.

    Read on to find what real estate businesses are doing to tackle liquidity crunch.


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