Liquidity For Solid Realty: How Easy Foreign Funds Will Change The Sector
Foreign private equity (PE) investments in India's real estate market zoomed to $2,220 million in 2015, a 33 per cent rise from $1,676 million the previous year. Much of this increased flow of funds could be attributed to the relaxed foreign direct investment (FDI) norms in the country. Investment in the real estate and construction sector accelerates creation of infrastructure and employment and has a multiplier effect on the larger economy.
The earlier story
FDI in the real estate sector was first allowed in 2005 for development of townships, and construction of residential/commercial premises, roads and bridges. However, it came with various restrictions, making it unfeasible for foreign players to invest in India. To avail of foreign investment, it was necessary for a project to have a minimum floor area of 20,000 square metres and a minimum capital of $5 million. Exit and repatriation of foreign funds was also cumbersome, with a prescribed lock-in period. Investors also needed prior approval of the Foreign Investment Promotion Board (FIPB) to exit projects.
However, the Department of Industrial Policy and Promotion (DIPP) in November 2015 introduced major reforms to the FDI policy for the real estate sector. Norms were relaxed by reducing the minimum built-up area and capital requirements, besides allowing easier exit.
- The earlier requirements of a minimum built up area of 20,000 sq mt and capitalisation of $5 million have been done away with. Only a few projects had been able to meet these requirements; most others remained out of bounds for the foreign investor.
- Earlier, a foreign investment could be made only within the first six months from the date of the start of a project. This restriction has also been lifted. Indian real estate has seen many projects getting stalled midway for want of funds. Such projects will be able to access foreign funds and get a new lease of life.
- The new norms prescribe that each stage of construction will be considered a separate project. This will enable developers to access funds according to the construction proceeds and encourage timely execution of projects.
- It has also been clarified that leasing/renting of completed projects does not constitute real estate business. Real estate business falls under the 'prohibited' sector and this move will allow FDI in leasing/renting of completed projects. Real Estate Investment Trusts (REITs) will get a boost from this investment. This will prove a game-changer and is expected to fuel demand from international investors in completed commercial buildings. The intent of the government is to open another avenue for FDI in operations and management of completed rent-yielding projects. Management and operation of malls/shopping complexes, business centres and townships can now avail of 100 per cent FDI under the automatic route.
- Foreign investors can now exit at any stage of investment:
A. On completion of three years from the date the FDI was brought in.
B. Completion of that particular stage of project for which the FDI was made. Earlier, an approval from FIPB was required for this.
- Besides, a non-resident can transfer his stake to another non-resident. Such a transfer should not involve any repatriation of investment and could be done without any government approval. It will not be subjected to the three-year lock-in period. The lock-in period will not apply to hospitals, special economic zones, educational institutions, old-age homes, hotels & tourism resorts and NRI investments.
What more is needed
- By further reducing the lock-in period to one or two years, the government may attract more funds.
- The entry and exit norms have been relaxed but they still lack clarity. To make them more investor-friendly, these need more clarity.
- When implemented, the Real Estate Regulatory Bill will increase the credibility of the sector among foreign investors. Malpractices of developers and fly-by-night operators have been a discouraging trend.
- Land is a state subject and to attract FDI in real estate, the Centre and states will have to work together. Infrastructure projects like 'smart cities' and 'Housing for All by 2022' need huge investments; easy access to foreign funds will be a great step to achieve those.