India’s easing of Foreign Direct Investment (FDI) norms for the real estate sector, the intent to found and build at least a 100 Greenfield smart-cities, and related moves by the current NDA government has lifted the sentiment in the sector. FDI inflows, especially, are quite likely to boost investment into the sector and rejuvenate a sector that has been languishing in the blues for quite some time now, writes Vinod Behl for NRI Achievers…
The government’s recent policy initiative to ease FDI rules in construction by reducing the minimum capital requirement from US$ 10 million to US$ 5 million, and the built up area from 50,000 sq.mts. to 20,000 sq.mts. may well provide a lifeline to the fund-starved, debt-ridden property developers. However, more reforms to boost credit flow are needed to provide a long-term solution to the funding crisis faced by the real estate sector. This development should be seen in the context that availability of funds at a good price has for long been a big challenge to the real estate sector, especially as funding from banks and other financial institutions have been restricted and slow, and borrowing from other sources have been expensive. But with this new move, the cost of funds is likely to become more competitive. It will boost investor sentiment and increase investment flow by specially providing a window to those foreign developers who earlier could not invest due to higher investment caps. It will also be a boon for small and medium size developers to access FDI, as earlier these developers holding small land parcels were not eligible for FDI. This is going to also make things easier for those developers who are constrained by non-availability of bigger land parcels and high cost of land within city limits. The relaxation in area and capital norms will provide a fillip to small office, residential and shopping centre projects much in demand in tier 2 and tier 3 cities. The exemption to projects which commit 30% of their total cost to affordable housing will give a boost to this segment with highest demand. Also the government has done away with the condition of mandatory 50% development in 5 years from the date of approval, and has permitted the investors to exit on completion of the project, or after three years from the date of final investment, subject to development of trunk infrastructure. This is a quite attractive proposition for both current and future investors. The latest FDI reform has further improved investor sentiment which has been on the upswing after the installation of corporate-friendly, stable government that has taken a number of reform initiatives. It is clearly evident from the FDI inflows, which jumped by 34% to US$ 7.23 billion, up from US$ 5.3 billion in 2013-14. PE funding that rose from US$ 670 million in 2013 to US$ 855 million in 2014 during the January- September period is also an indicator of this. According to an Assocham survey, there is also one third rises in enquiries from NRIs for investment in Indian real estate.
Global investors are increasingly looking at property investment in India due to global economic improvement and better transparency and investment climate in India. They also find better investible assets especially in commercial real estate. And now especially with India opening up the REITs market, this interest has further gone up. According to a KPMG study, out of the estimated 350 msf of Grade A office space valued at around US$ 65-70 billion across major urban centres, about 80-100 msf valued at US$ 15-20 billion will be REIT friendly over next 3 years. They are also looking at immense opportunities being thrown up by the Indian government’s decision to develop 100 smart cities which need annual funding of at least INR 35,000 crore. Notwithstanding all this interest of foreign investors in Indian real estate, the big question is whether FDI alone is the answer to the burgeoning funding requirement for all this. Considering the current housing shortage of 19 million homes, and to achieve the goal of housing for all by 2022. We will need close to 16.5 lakh crore rupees per year for next 8 years, whereas currently housing development is getting less than 8 lakh crore rupees of annual investment. The challenge becomes all the more enormous as the real estate sector has been facing crisis on household savings, equity funding and bank credit, the three main sources of real estate funding.
Industry statistics reveal that close to US$ 1 trillion was invested in the real estate sector between FY 2008 – FY 2014, and 72% of this funding was met by household savings, which have now considerably gone down. Equity market and PE funding which accounted for 10% in FY 2008 has now halved. And though real estate gets less than 4% of total bank advances, yet RBI has raised concerns over real estate exposure up from INR 60,000 crore in 2007-08 to INR 1,54,000 crore and housing exposure from INR 2,60,000 crore to INR 5,40,000 crore. However what is really reassuring is that the investment bucket is getting enlarged with large sovereign wealth funds and pension funds coming forward. But considering the enormity of the challenge, we will need a lot more reform measures to boost funding. This includes widening the ECB window by upping the US$ 1 billion limit.
One is hopeful that the government, which is reviewing foreign investment policies for Limited Liability Partnerships (LLPs), will soon lift curbs and provide automatic access to foreign investors via LLPs in sectors like real estate where 100% FDI is permitted. The newer emerging investment vehicle of Commercial Mortgage-based Securities (CMBS) also holds promise. As home loans are a key to housing growth, government is undertaking positive policy initiatives in this regard. It has already increased home loan entitlements from 80-90% of property value and it is now planning to hike interest subsidy for low cost housing to 5%, besides lowering interest rates. And by proposing to bring in an amended Land Acquisition Act and a Real Estate Regulatory Bill in the upcoming Winter Session of Parliament, the government will be further making the investment environment conducive for investors by cutting down delays in land acquisition and building approvals, and by making the real estate transactions more transparent.