Significant Recovery Rate Increase for Stressed Real Estate Projects in India

Recovery Rate Projections for Asset Reconstruction Companies

New Delhi, June 16: A recent report from Crisil Ratings indicates that Asset Reconstruction Companies (ARCs) are expected to see a 16 percentage point rise in the cumulative recovery rate of Security Receipts (SRs) related to distressed real estate projects, reaching 38% in the current financial year.

This positive trend is attributed to strong sales of new units within these projects, driven by consistent demand in the residential real estate market, supported by strategic debt restructuring efforts by ARCs.

The analysis conducted by Crisil encompasses 70 troubled real estate projects situated in the NCR, MMR3, and various micro-markets in Bengaluru, with SRs totaling approximately Rs 10,800 crore.

Many of these projects had been ensnared in a cycle of increasing debt due to declining sales, slow collection rates, and insufficient funds for construction, issues that are now being addressed.

Post-pandemic, the rise in real estate prices and heightened demand in these micro-markets have made these projects attractive for external investors, enhancing their viability.

Looking ahead, demand for residential real estate in these areas is projected to increase by 7-9% in 2025-2026, further bolstering sales for these distressed projects.

Approximately two-thirds of the evaluated projects fall within the mid-premium category and above, which are anticipated to account for up to 80% of recoveries for ARCs, thanks to stable demand in fiscal 2026. The remaining projects, categorized as affordable, are expected to experience modest demand and contribute less to recoveries this fiscal year.

The report highlights that debt restructuring has become the favored approach for resolving issues in stressed real estate projects for two main reasons.

Firstly, ARCs can reduce debt to manageable levels with an initial payment moratorium, enabling developers to focus project cash flow on completing construction.

Secondly, restructuring is preferred by ARCs due to the complex nature of the real estate sector, which includes dual ownership of land and development rights, various Special Purpose Vehicle structures with cross-collateralization, and multiple layers of state authority approvals.

While restructuring ensures that promoters remain invested in the projects and facilitates quicker resolutions, the complexities involved make alternative strategies like the Insolvency & Bankruptcy Code (IBC), enforcement, and liquidation more prolonged, resulting in lower recovery rates.

Approximately 40% of the stressed real estate projects within the Crisil Ratings SR portfolio have undergone restructuring as the main resolution strategy, leading to anticipated nominal recoveries that could reach the full principal amount of debt over an 8-year trust period.