FDI to boost realty sector
Relaxations in FDI will encourage investors to share risks and earn higher returns
The foreign investments in the real estate sector in India have been stagnating for a long period of time; for some investors since the last cyclical high of 2006. The FDI restrictions prevented foreign outflow of capital for real estate projects that did not meet the necessary criteria such as requirement of minimum capitalisation, minimum construction area, etc. The projects have not made progress due to a variety of reasons ranging from scarcity of capital to regulatory approvals required for construction projects in India. The investors have been wary of increasing their investments in the existing projects and bring them to completion due to policy paralysis. Due to this, the foreign inflow of capital into real estate sector was mainly coming into India through the foreign portfolio investment (FPI) route via NCDs. Debt exposure to real estate was preferred over equity participation due to the FDI conditions in real estate sector and the burden they would entail on the foreign investors. The relaxations in the FDI conditions can encourage investors to provide the much needed fillip of sharing risk and earning higher returns on their investments in real estate sector. This could also have a positive impact on the sector due to real estate being a capital intensive industry.
On November 10, 2015, the government did away with the restrictive FDI conditions which prevented foreign investors to exit their investments in the real estate project before its completion is a master stroke. The recommended changes in the FDI policy dealt with the investors’ long time concerns effectively. The restrictive FDI conditions such as mandatory development of minimum floor area of 20,000 sq m per project and minimum infusion of FDI of $5 million within six months have been removed which could facilitate the government’s initiative on affordable housing in India for all by 2022. The FDI amendment further states that each phase of the construction development project would be considered as a separate project for the purpose of FDI policy. This amendment to the FDI policy will facilitate simpler entry and exit for foreign investors linked to their risk participation in the specific real estate project in India.
Earlier, foreign real estate investments into large projects would stagnate for large periods of time, due to the gestation period of the projects and prevent the investors from exiting in a timely fashion. As per the new amendment, foreign investors can exit and repatriate foreign investment even before the completion of the project under automatic route subject to the three year lockin for every tranche of foreign investment or after the completion of trunk infrastructure.