Real estate safe as houses for FDI

Foreign Direct Investment (FDI) is a significant driver of economic growth and a substantial contributor towards the expenditure fuelling the nation’s developmental ambitions. The real estate industry is a cornerstone of the economy, is the second-largest source of employment after agriculture and has a multiplier effect on 270 related sectors. Forecasts for growth are expecting it to reach USD1 trillion by 2030.

As the industry transforms, it has seen a substantial surge in foreign investment. Under the current policy, certain sectors are prohibited from receiving FDI, either through the automatic or the government approved routes. The real estate business is one such sector. A real estate business includes any entity that is engaged or proposes to engage in real estate business, construction of farmhouses and trading in transferable development rights. FDI is not permitted in such entities.

However, real estate business does not include the development of townships, the construction of residential and commercial premises, roads, bridges and real estate investment trusts (REIT) regulated under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations 2014. FDI is thus not permitted in businesses dealing in land and immovable property solely for profit.

However, the development of townships, construction of residential and commercial buildings, roads and bridges, educational institutions, hospitals, resorts, hotels, recreational facilities, city and regional-level infrastructure, townships, real estate broking services and the earning of rent or income on leases of property not amounting to transfer, are not considered real estate business and FDI is not prohibited.

Where it is permitted, FDI is allowed up to 100% under the automatic route. FDI may be made by non-residents in equity shares and fully compulsory and mandatory convertible debentures. FDI can be in the fully compulsory and mandatory convertible preference shares of an Indian company through the automatic route, which requires no prior government approval. However, depending on the investment vehicle and the sector in which the Indian company is involved, investors and the company may have to report under the provisions of the Foreign Exchange Management Act, 1999. They will also have to comply with all applicable laws, regulations and rules.

FDI in construction development projects under the automatic route is subject to conditions. A foreign investor may withdraw and repatriate their investment before a project’s completion or following the development of essential infrastructure such as roads, water supply, street lighting, drainage and sewerage (trunk infrastructure), provided that a mandatory lock-in period of three years has expired. This lock-in does not apply to specific projects, including hotels, tourist resorts, hospitals, SEZs, educational institutions, old-age homes and investments by non-resdent Indians. All projects must comply with relevant regulations, including land use requirements and community amenities, as stipulated by the relevant authority. The Indian company must obtain all necessary approvals from the authorities concerned and can sell only developed plots, that is where the trunk infrastructure is already in place.

The Department for Promotion of Industry and Internal Trade states that real estate-related activities generated FDI of USD4.026 billion from April 2023 to December 2023. Of this, USD185 million was from the development of townships, housing, infrastructure and other construction projects. Between April 2000 and December 2023, real estate activities attracted FDI of USD60.07 billion or 9% of that period’s total FDI. The increase of FDI in the real estate sector has come from policy easing, significant growth in the property technology sector, robust demand for high-quality office space and the emergence of alternative investment vehicles such as REITs.

The real estate market has grown robustly over time. An ever-growing urban population has fuelled demand for residential and commercial development. International investors have brought capital and imposed global best practices. These have improved the standards of planning, construction and design. The real estate market is robust and resilient and continues to appeal to investors, local and international alike.

Rohit Jain is the managing partner and Diviay Chadha is a partner at Singhania & Co.