The government’s move to relax foreign direct investment (FDI) in the construction sector, by removing two major conditions related to the minimum built-up area and capital requirement, was hailed as a game changer. The government has also eased the rules for foreign investors to exit and repatriate their investments. Developers feel that these moves will help the cause of affordable housing, as any project under construction, regardless of size, can now have access to FDI.
Will FDI inflow increase prices?
However, past experience suggests that FDI inflows have actually contributed to the skyrocketing of property prices. It has defeated the cause of affordable housing in India, as easy funding has increased the supply of high-end houses in major Indian cities. When FDI was first allowed into the sector in 2005, property prices increased quickly until the global economic meltdown tamed this unsustainable growth. Between 2005 and 2008, nearly all the developers who received large foreign funding, focused on the luxury and super-luxury housing segments.
Defending the sector, Vineet Relia, managing director of SARE Homes, maintains that boosting foreign investment bodes well for the cash-starved sector and will accelerate the development of stagnant projects. Allowing phase-wise foreign investment in projects and the ability to exit and repatriate investments, indicate a strategic shift for a sector where most projects get stuck owing to government approvals and funding.
“The removal of the minimum capital investment of $5 million and floor area restriction of 20,000 sq metres, will help investors to get better returns. The government has also provided clarity on FDI in greenfield projects, where a foreign investor can now partner with an existing Indian entity and exit the project after a minimum lock-in period of three years,” explains Relia.
See also: Affordable housing to see maximum demand
Will end-users benefit?
Nikhil Hawelia, managing director of the Hawelia Group, disagrees with the contention that FDI would lead to affordability being compromised. According to him, the end-users were the major beneficiaries of a demand-driven growth and consequent appreciation in real estate prices that followed the first infusion of foreign funds in 2005. “Had it been an investor-driven growth, I would have been sceptical with the foreign money coming into the sector. However, the boom in the housing market was driven by end-users and they were the ones to make profits,” he argues.
Nevertheless, the fact is that FDI in limited liability partnerships (LLPs), is now permitted under the automatic route for the sectors in which 100% FDI is allowed, and there are no performance-linked conditions. Consequently, FDI inflows into the Indian real estate sector over the next few years, are likely to be driven by expectations on ROI. This could fuel an increase in prices.
With unsold inventory piling up in most of the major Indian cities, a fresh infusion of foreign funds may attract more investors than end-users to the housing market. Analysts therefore, caution that funding alone cannot lead to a sustainable housing market. One also needs to consider the demand and supply situation and the median income of the given city, to bring about a meaningful change in the sector.
(The writer is CEO, Track2Realty)
Ravi Sinha is a journalist with nearly two decades of cross-discipline media exposure. He is the CEO of real estate think-tank group Track2Realty. He has been writing extensively on the real estate sector for nearly a decade. Evaluation of real estate brand performance is his expertise and he has immense insight into consumers’ psychograph in the property market.
Twitter: https://twitter.com/ravitrack2media
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