The government of India has relaxed the rules for Foreign Direct Investment (FDI) into real estate sector in India. What will be the benefits to realty sector and what is missing from these new policy changes?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

As presented by Union Finance minister Arun Jaitely during his July budget speech, the changes to relaxation in FDI (Foreign Direct Investment) into real estate sector in the country has now been notified.

The changes - FDI into Real Estate

• Minimum area requirements, in case of Construction-development projects - built-up area of 20,000 sq. mts now from 50000 sq. mts.

• Investment - Minimum capitalization for wholly owned subsidiaries - US$ 5 million now from US$ 10 million. However, the lock-in period for investment has not been relaxed from 3-years. Foreign investors can still exit earlier if the project is completed. The Government may also permit repatriation of FDI or transfer of stake before project completion on a case to case basis by Foreign Investment Promotion Board.

• For serviced plots — where roads, water, drainage and other conveniences are available — the minimum land size has been waived, from a requirement of 10 hectares earlier.

• To boost funding to affordable housing projects, the conditions of minimum floor area as well as capital requirements are waived if at least 30 per cent of the total project cost is committed for low-cost affordable housing. To qualify as an affordable housing project, at least 60 per cent of the floor area must be used to build small homes (not more than 650 sq feet).

These are all welcome steps by the government to boost real estate sector in India. The sector which is starved of liquidity can breathe a sigh of relief. However, the notifications would not result in pouring of FDI in short term. It may take 9-12 months before we see results on the ground.

Reduction in minimum built up area to 20000 square meter and reduction in capital investment to US$ 5 million will have rippling effect on the state of the property market in India. Experts and analysts believe that these 2 initiatives can in fact help in doubling the FDI into the real estate sector. FDI into construction development sector was 1.22 billion US$ in fiscal year 2013-14 (1 April 2013 to 31 March 2014). Whereas FDI into real estate sector in fiscal year 2012-13 (1 April 2012 to 31 March 2013) was 1.3 billion US $. This year from 1 April 2014 to 31 August 2014, the FDI flows into real estate sector have been 446 million US $. Below one can find the history of FDI in India in various sectors including the real estate.

What will be the benefits?

• Liquidity

It is a well known fact that developers are cash strapped and are in dire needs of funds to complete projects. Since 2011, the repo rates have been hovering in the range of 8%, making it extremely costly for developers to raise funds from banks and financial institutions. With these relaxations in place, developers can now have access to institutional funds.

• Small Projects

Prior to this, small projects of size less that 50000 square meter were not allowed to access FDI. However, this has been changed now. Small scale real estate developers coming up with housing societies, multi family developments can now be exposed to institutional funds.

• Affordable Housing

The government is of the view that state of affordable housing is in dire straits of special attention. Till 2012, approximately, 18.78 million units were needed to be built. And about 99% of the total shortage of housing in urban areas belongs to the Economic Weaker Section and Low Income Groups of the society. This new policy initiative will give boost to affordable housing in India and will be a step in right direction to achieve housing for all by 2022.

What is missing from the new policy initiative?

Land-use rules for the sector have not been mentioned in this new proposal by the union government. Norm on land-use is a local issue which will vary from State to State, remarked a DIPP official.

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