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All you wanted to know about Real Estate Category II AIF

In a bid to boost the ailing real estate sector, which is sitting on a large inventory of unsold and incomplete projects, the Centre last week proposed to create a Category II Alternate Investment Fund (AIF) to provide last-mile funding to the sector. The Centre plans to invest 10,000 crore in the fund, while 15,000 crore will be pooled from domestic institutions such as LIC and other investors in a phased manner.

While the move has been hailed as a much-needed lifeline for the realty sector, the challenge lies in the funding and implementation of the AIF.

What is it?

Alternate Investment Funds, AIFs in short, are funds that pool capital from investors, primarily HNIs and institutions, to invest in asset classes such as real estate, venture capital and private and public equity. Over 300 such funds have been registered with SEBI since 2012 when the AIF guidelines were notified.

Under SEBI guidelines, AIFs operate in three categories. Category I AIFs invest in start-up or early-stage ventures, SMEs, infrastructure or other areas which the government or regulators consider as economically desirable. Category II AIF includes real estate funds, private equity funds, and funds for distressed assets. Such funds are prohibited from raising debt except for meeting day-to-day requirements. Lastly, Category III AIFs are those investing with view to make short-term returns and include hedge funds and PIPE funds.

The recent AIF Category II fund that was announced would pool funds from LIC, public sector banks such as SBI and other foreign institutions to fund developers for completing stalled residential projects in the mid and affordable housing segments. The fund will be managed by SBI Caps.

Why is it important?

The slowdown in the real estate sector followed by tight liquidity situation has affected the sector badly, resulting in large unsold housing inventories. Legacy projects have also been stalled by developers, who have been diverting funds to other projects and then running out of money. The Centre’s proposed AIF worth 25,000 crore is expected to fund stalled projects in order to rescue home-buyers. It is estimated that there are about 1,600 stalled projects with about 4.58 lakh housing units.

Once the AIF disburses funds, the expectation is that construction in the stalled projects would resume, helping their buyers move in to their homes. This is also expected to revive buyers’ confidence in the realty market, and boost employment and improve demand for allied sectors such as iron, cement and steel.

While the measures seem to be positive for both home buyers and developers, the challenges for the AIF may lie in attracting institutional investors outside of public sector entities for funding, vetting the stalled projects, and managing to complete them at a cost that generates a good return for its own investors.

Why should I care?

If you are an aggrieved home buyer who has not received possession of your property, then there’s hope for you from the AIF. Over 80 per cent of the stalled housing projects are believed to be in the mid to affordable range, the target segments for this fund.

Projects, to be eligible for the AIF, need to meet a few conditions. The housing unit should not exceed 200 square metres in carpet area, and come with a city-wise price cap of up to 2 crore. Only RERA-registered stalled projects will be eligible. The Centre has allowed the AIF to include projects that have been declared NPAs and undergoing insolvency proceedings under NCLT (and not under liquidation). However, these projects need to be net worth positive.

The Centre has done what it can. It’s now up to the industry to clean up its act.

[“source=thehindubusinessline”]