One of the key beneficiaries of the Indian government’s move to ease foreign direct investment (FDI) norms in 15 sectors, is the construction and real estate sector.
The changes
The changes in FDI norms will make it easier for foreign investors, to enter and exit projects. Earlier, foreign investors could not invest in projects that had a floor area of less than 20,000 sq metres. This restriction has now been removed.
Under the previous norms, foreign investors had to invest at least US$ 5 million in a project. This money had to be brought within six months of the commencement of the project. Both these restrictions have now been removed.
Now, foreign investors can exit a project and repatriate their investment even before the completion of a project, although they must stay invested for three years. They may move out before three years, if the project or trunk infrastructure is completed earlier. This lock-in period will also not apply to hotels, hospitals, special economic zones, educational institutions and investments by NRIs.
Moreover, the government has permitted 100% FDI under the automatic route, in completed projects. It has also clarified that leasing and rental activities will not come under the definition of real estate.
See also: Construction and infrastructure receive second-highest FDI
The impact
India’s real estate sector is in the midst of a slowdown. As buyers’ interest in real estate remains muted, developers are finding it extremely difficult to sell their projects and raise money for construction. The government’s measures, to ease the flow of FDI into the sector, will help cash-starved developers.
According to experts, the removal of the restriction on minimum size and minimum capitalisation, will enable FDI to come into smaller-sized Fprojects, including tier-II and tier-III cities. As commercial projects tend to be bigger, this measure will especially help the residential sector, where the slowdown is more pronounced. Affordable housing projects could also benefit. “With relaxation in minimum capitalisation, area and exit norms, we are hopeful that more foreign capital will enter India’s realty sector, particularly residential projects. This is likely to provide a much-needed push to rejuvenate growth in the sector,” says Anshuman Magazine, CMD of CBRE South Asia.
Allowing FDI in completed buildings for earning rental income, will allow developers to sell their completed buildings and free up money for new projects.
Will this aid the sector’s revival?
For demand to revive in the residential segment, consumers need to turn more confident about their own economic prospects, before they take on a massive liability such as a home loan. Investors’ confidence in many micro-markets has been hit, due to delays in projects. Confidence in builders too, can’t be revived overnight.
The previous bull run in real estate, pushed property prices in most major cities to very high levels. There needs to be some reduction in prices, for buyers to return to the market. Here, the inflow of FDI could, in fact, prove counter-productive. “This development (easing of FDI norms) may make developers optimistic about receiving easy cash flows. Consequently, the possibility of a price reduction may become even more remote,” cautions Gulam Zia, executive director of Knight Frank India.
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