Report: Higher Property Prices and Legal Changes to Enhance Debt Recovery from Stressed Realty Projects

Synopsis

The recovery of debt from stressed residential realty projects is expected to increase in the current financial year due to rising property prices and regulatory changes. Crisil forecasts a bad loan recovery rate of 16-18% by FY25, driven by improved project viability, strong demand, and investor interest. Recent amendments to IBBI regulations are also seen boosting real estate asset resolution. With residential realty demand projected to grow by 10-12% and low unsold inventories, ARCs are expected to expedite the turnaround of stressed projects.

Debt Recovery Boosted by Higher Property Prices and Legal Changes

The recovery of debt from stressed residential realty projects is set to increase in the current financial year due to higher property prices as well as changes in rules, a report said on Monday. The bad loan recovery rate is estimated to touch 16-18 per cent at the end of FY25 from 11 per cent as on March 31, 2024, domestic rating agency Crisil said in a report.

Improved Viability and Regulatory Support

"This 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," the agency said.

It added 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.

Performance Analysis

The agency said it analyzed the performance of its portfolio comprising security receipts of Rs 9,000 crore from 70 stressed realty projects with a saleable area of 66 million square feet while arriving at the estimates.

It said residential realty demand is set to increase by 10-12 per cent courtesy a healthy economic growth and buoyant demand across housing segments in top-six cities.

Low Unsold Inventories

Additionally, it said low unsold inventories across major micro markets will also help ARCs (asset reconstruction companies) turn around stressed real estate projects faster with support from promoters or external investors.

Impact of Past NPAs

A bulk three-fourths of the projects it analyzed turned 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, it said.

Optimistic Outlook

Crisil's senior director Mohit Makhija said 33 million square feet of unsold inventory 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.

"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," he added.

Amendments in Insolvency Rule

The agency further said the amendments in insolvency rule made in February this year enable the resolution of individual projects by delinking them from the entire corporate entity involving multiple projects and group inter-linkages.

Speaking of the necessity of the amendments, it said only 8 per cent of the admitted cases have been resolved under IBC and debt worth Rs 40,000 crore was stuck across 100 ongoing realty cases for more than two years.