Appeal increases for Chinese investors in India’s real estate sector

It is not uncommon for most large-sized Chinese companies, whether state-owned or private, listed or unlisted, to have a real estate business or division within their organisation. As such, in the past decade or so, many Chinese companies across sectors have booked substantial profits on account of their real estate assets in China. Others have bulked up their asset base by continuously investing in real estate. This strategy has served them well by providing free cash flows that can be diverted to other businesses, or providing collateral for much needed debt to fund expansion.

There are also companies that have focused exclusively on real estate and benefited enormously from China’s rapid economic growth. Some of the large real estate companies in China have projects in almost every provincial capital and most second-tier cities. This unparalleled coverage, combined with the ever-growing demand from first-time buyers and investors, has ensured their rise to the top.

With economic growth gradually stabilising and real estate prices at all-time highs in most Chinese cities, several Chinese companies are now looking to replicate their success in the real estate business in foreign jurisdictions. India, with its growing income levels and burgeoning population, might be emerging as a promising destination for Chinese real estate companies.

Chinese interest

Legal position on foreign investment in Indian real estate. There might be three categories of Chinese investors who are interested in the real estate sector in India: a) investors – real estate companies or financial investors seeking to benefit from India’s economic growth; b) industry players – Chinese companies that have set up their business in India, or are planning to enter the Indian market; and c) Chinese individuals. This article will outline the legal position as applicable to each of these categories.

Investment criteria

There are three categories of criteria that need to be met when foreign investment is made in real estate projects in India.

1. Minimum area. The minimum area under development must be 10 hectares (25 acres) in case of serviced housing plots, or 50,000 square metres built-up area in case of construction development projects. In case of a combination project, fulfilling either of these two conditions shall suffice.
2. Minimum investment. Minimum capitalisation for a wholly owned subsidiary of a foreign investor is US$10 million, and for a joint venture with an Indian partner the minimum foreign investment must be US$5 million. Such foreign investment cannot be repatriated before a period of three years from completion of capitalisation. However, the foreign investor can exit earlier after obtaining prior approval from the Foreign Investment Promotion Board (FIPB).
3. Timeline. At least 50% of the project must be developed within five years from the date of obtaining all statutory clearances. Further, the developer is prohibited from selling plots of land without providing utilities such as roads, water supply, street lighting, sewerage, etc.

In addition, all real estate projects must conform to the norms and standards specified by the relevant local statutory body, and all necessary approvals must be obtained.

The only real estate projects that might be exempt from the above conditions relating to area, capitalisation and timeframe are certain types of hotels in the tourism sector, certain types of hospitals in the healthcare sector, and special economic zones (SEZs).

Doing business in India

Chinese companies that have set up their business subsidiaries in India, either wholly owned or in joint venture with an Indian partner, are free to acquire properties either on an ownership or lease basis to meet their business objectives. This could include acquiring real estate assets such as office space, warehouses or factories. The only pre-condition to be met is that a strong nexus must exist between the business objective of the Chinese company and the concerned real estate property.

In other words, the acquisition of such real estate must be in furtherance of the Chinese company’s business objectives. Merely acquiring real estate in order to profit from its appreciation or conducting business that could be termed as “real estate business” is prohibited for such companies.

Chinese companies without a subsidiary in India, which operate through a branch office, are also allowed to acquire immovable property that is necessary for or incidental to carrying on such business activity subject to prior approval of the Reserve Bank of India (RBI).

In both of the above cases, the following conditions should be met:

1. The payment for acquiring such property has to be made by way of foreign inward remittance through normal banking channels; and
2. On winding up of the business, the sale proceeds of such property can be repatriated only with the prior approval of the Reserve Bank.

Chinese individuals

Foreign nationals are not permitted to purchase immovable property in India. However, Chinese nationals working in India are permitted to obtain leases on residential properties for a period not exceeding five years. Any lease exceeding five years will require specific approval from the RBI. Similarly, liaison offices are also not allowed to acquire immovable property and can only obtain a lease not exceeding five years.

Current scenario

Stable demand, demographic factors and focus on affordable housing make the Indian real estate sector attractive. In addition, the liberalised regulatory regime that makes 100% foreign investment possible in real estate projects has been successful.

Several international companies like Hines, Tishman Speyer, Emaar Properties, Ascendas, Capitaland, Portman Holdings and Homex have already made forays into the Indian real estate market.

Late last year, the Dalian Wanda Group announced a joint venture with India’s Reliance Group. The parties announced their preliminary intention to develop at least two township projects in India, one in Mumbai and the other one in Hyderabad. Considering that the Wanda Group is one of the leading players in China’s real estate industry this move might prove to be one that is worthy of emulation by other Chinese companies.

Santosh Pai and Vikas Kumar are partners at D H Law Associates. D H Law Associates is the only full-service Indian law firm with an active China practice since 2010