Paving the road ahead for FDI in real estate in India

By Amitabh Chaturvedi and Utkarsh Tewari, Mine & Young
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With India’s policy makers emphasizing and working towards developing adequate infrastructure, the Indian real estate sector has turned out to be a large employment generator. Since the early 1990s, India has liberalized its foreign trade and investment policies, resulting in huge capital inflows in the form of foreign direct investment (FDI).

Amitabh Chaturvedi Managing partner Mine & Young
Amitabh Chaturvedi
Managing partner
Mine & Young

Until 2005, foreign investors had to seek permission from the Foreign Investment Promotion Board and/or the Reserve Bank of India to set up real estate development and construction projects. In 2005, the Indian government allowed FDI of up to 100% in the real estate sector through automatic route, without prior government permission. The real estate sector saw a massive revolution with respect to development and infrastructure, and today real estate is a most alluring sector for investment.

Still, some vagueness and indistinctness exists with regard to FDI in the sector.

Conditions apply

Allowing FDI up to 100% is subject to certain guidelines and restrictions. Each project has to comply with conditions laid down in the FDI policy with regard to area as well as investment. Under the real estate policy of 2005, for development of serviced housing plots the minimum land area is 10 hectares, while for construction development projects the minimum built-up area is 50,000 square metres. In combination, compliance with either condition is sufficient.

The minimum capitalization required is US$10 million for subsidiaries and US$5 million for joint ventures. Further, development of at least 50% of an integrated project must be completed within five years from the date of obtaining all statutory clearances required.

Highs and lows

With the involvement of international players, the Indian realty sector has come a long way from being a highly unorganized sector, and real estate operators have extended their scope of operations beyond local markets. But the sector has witnessed highs and lows throughout this period, due to changes and amendments in the FDI policy, resulting in investor apprehensions and uncertainty with respect to the real estate sector, affecting the inflow of FDI.

The policy has loopholes and poses certain challenges with respect to built-up area, minimum investment, commercial meaning of “joint venture” and lock-in period of investment, etc. The FDI policy guidelines do not apply to investment by individual non-resident Indians (NRIs) but if NRIs wish to invest through their foreign companies, then the FDI guidelines will apply. Also, the FDI policy specifically states that FDI is not allowed in real estate business or construction of farm houses, in any form whatsoever, including a partnership or a proprietary concern engaged in real estate business.

Borrowing restricted

Further, external commercial borrowing (ECB) is still restricted for the real estate sector, hindering an important source of financing for real estate companies. The Union Budget 2012-13 allows ECB for affordable housing projects, and withholding tax on such ECB has been reduced from 20% to 5% for three years, but this will not help high-end projects and commercial real estate.

Utkarsh Tewari Partner Mine & Young
Utkarsh Tewari
Partner
Mine & Young

The sector is striving to get industry status, which would enable developers to obtain funds from markets abroad at reasonable costs. Developers and others associated with the Indian real estate sector also want a regulator for this sector like other sectors such as insurance and telecoms.

The growth of the real estate sector is linked with education, tourism, etc. For instance, the entry of private players in the education sector has increased the demand for real estate for education facilities; and a rise in the number of tourists and expatriate employees in India has in turn resulted in more demand for hotels, motels, restaurants and serviced apartments.

Other effective means of FDI in Indian real estate include residential and commercial complexes, multiplexes, malls and shopping complexes, facilities in the hospitality and healthcare sectors, industries, leisure organizations and infrastructure.

To sustain and enhance the growth of FDI in the realty sector, India must further explore its potential to draw foreign investments. As a developing country with a growing economy, India offers better real estate prospects than developed nations, and the increasing demand for housing, commercial space, townships and infrastructure in India can only be met with adequate foreign investment.

This can be achieved through initiatives and measures such as establishing a single-window clearance system for all statutory clearances required for real estate projects; providing lower interest rates, subsidies and tax relief by increasing the exemption limit for borrowers investing in real estate; and developing a mechanism for overcoming delayed completion of projects resulting in delayed possession. Such measures would help to accelerate growth in the real estate sector.

Amitabh Chaturvedi is the managing partner of Mine & Young, where Utkarsh Tewari is a partner. Since 2005, Mine & Young has handled over US$500 million in FDI in real estate in India for projects with a capital outlay of over US$4 billion.

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