New in­vest­ment av­enues for NRIs

The 100 smart cities and REITS pro­pos­als present new in­vest­ment op­por­tu­ni­ties

HT Estates - - HT­ES­TATES - Neeraj Bansal

Ow­ing to lib­eral eco­nomic poli­cies adopted by the govern­ment over the last few decades, In­dia has seen a cap­i­tal­i­sa­tion of strong eco­nomic fun­da­men­tals, in­clud­ing a young pop­u­la­tion, ris­ing ur­ban­i­sa­tion, in­fras­truc­tural devel­op­ment etc. The real es­tate sec­tor, which is deeply linked to eco­nomic per­for­mance, is a di­rect ben­e­fi­ciary of strong eco­nomic growth. Sup­ported by strong ur­ban­i­sa­tion trend, the share of the real es­tate sec­tor in na­tional Gross Do­mes­tic Prod­uct (GDP) is ex­pected to in­crease from 6.3% in 2013 to 13% by 2028 with the ab­so­lute value grow­ing seven times from US$ 121 bil­lion to US$ 853 bil­lion.

Ma­jor­ity of the real es­tate projects in In­dia (about 80%) is in the res­i­den­tial space and the rest com­prise of­fice, shop­ping malls, ho­tels and hos­pi­tals. The cur­rent built en­vi­ron­ment in In­dia is not ad­e­quate to sup­port long-term eco­nomic growth. For in­stance, In­dia has a hous­ing short­age of 6 crore units (ur­ban: 1.9 crore, ru­ral: 4 crore) houses and there is likely a need of ad­di­tional 5 crore units (ur­ban: 2.7 crore, ru­ral: 2.3 core) by 2022. Over­all, it is es­ti­mated that about 70% of In­dia’s built en­vi­ron­ment as­sets are yet to be de­vel­oped, which would re­quire sig­nif­i­cant fi­nan­cial, tech­ni­cal and devel­op­ment con­tri­bu­tion from other coun­tries.

With this aim, the real es­tate sec­tor was opened for for­eign in­vest­ments in year 2005 and has re­ceived 5% of to­tal For­eign Di­rect In­vest­ment (FDI) in­flow of coun­try, since then. Con­se­quent to the govern­ment’s pol­icy to al­low FDI in this sec­tor, there was a boom in in­vest­ment and devel­op­men­tal ac­tiv­i­ties. The sec­tor not only wit­nessed the en­try of many new do­mes­tic realty play­ers but also the ar­rival of many for­eign real es­tate in­vest­ment com­pa­nies, in­clud­ing pri­vate eq­uity funds, pen­sion funds and devel­op­ment com­pa­nies.

There was a pe­riod of slow­down in for­eign in­vest­ments af­ter the global fi­nan­cial cri­sis in 2009, largely ow­ing to exit pres­sure from in­vestors and weak global econ­omy. How­ever, the re­cent trends sug­gest re­vival of in­vest­ment cy­cle. In the last few months, the In­dian real es­tate sec­tor has wit­nessed in­creas­ing in­ter­est from large global funds. Sev­eral new in­vestors such as The govern­ment has com­mit­ted ₹ 8,000 crore and ₹ 4,000 crore to the Na­tional Hous­ing Bank to sup­port ru­ral hous­ing and ur­ban af­ford­able hous­ing, re­spec­tively. This would help in­crease the flow of cheaper credit for af­ford­able hous­ing to the ur­ban poor. Fur­ther, the govern­ment has al­lowed ma­jor di­rect tax ben­e­fit and af­ford­able loan ben­e­fits to home loan bor­row­ers, which would surely help stim­u­late de­mand for hous­ing.

Eas­ing liq­uid­ity is­sue

To at­tract for­eign in­vest­ment, the govern­ment has an­nounced re­lax­ation of FDI in real es­tate sec­tor and granted pass-through sta­tus to Real Es­tate In­vest­ment Trusts (REITs). There’s re­duc­tion in built-up area and cap­i­tal con­di­tions for FDI from 50,000 sq mt to 20,000 sq mt and from US$10 mil­lion to US$5 mil­lion, re­spec­tively with a lock-in pe­riod of three year post com­ple­tion of min­i­mum cap­i­tal­i­sa­tion. The ear­lier cap of 50,000 sq mt for FDI in the sec­tor was quite un­vi­able given the non-avail­abil­ity of space in the met­ros. To fur­ther en­cour­age in­vestors and de­vel­op­ers, the projects which com­mit at least 30% of the to­tal project cost for low cost af­ford­able hous­ing will be ex­empted from min­i­mum built-up area and cap­i­tal­i­sa­tion re­quire­ments, with the con­di­tion of a three-year lock-in.

REITs have been suc­cess­fully used as in­stru­ments for pool­ing in­vest­ment in sev­eral coun­tries. In or­der to in­cen­tivise REITs, they will be pro­vided with tax ef­fi­cient pass through sta­tus. REITs would help pro­vide an exit route to de­vel­op­ers from com­mer­cial real es­tate by at­tract­ing for­eign pen­sion and in­sur­ance funds.

It is es­ti­mated that In­dia has close to 400 mil­lion sq ft of com­mer­cial of­fice space of which about 100 mil­lion sq ft is ready to be let out. Ex­perts say that In­dian com­mer­cial real es­tate which is REIT com­pli­ant is likely to be worth US$10-20 bil­lion.

In ad­di­tion to eas­ing liq­uid­ity, REITs are also ex­pected to ad­dress sev­eral is­sues act­ing as an im­ped­i­ment to growth of the sec­tor such as low trans­parency, or­gan­i­sa­tion of the prop­erty mar­ket sec­tor etc.

Im­prov­ing ease of do­ing busi­ness

In midst of the growth story, the real es­tate sec­tor in gen­eral has wit­nessed some crit­i­cal chal­lenges in the form of lack of clear land ti­tles, ab­sence of ti­tle in­sur­ance, ab­sence of in­dus­try sta­tus, lack of ad­e­quate sources of fi­nance, short­age of labour, ris­ing man­power and ma­te­rial costs, ap­provals and pro­ce­dural dif­fi­cul­ties etc.

The govern­ment in the last few years has ac­cepted the re­quire­ment for well-man­aged and in­vestor- friendly land trans­fer and own­er­ship trans­fer mech­a­nism.

A large part of the land ti­tle clar­ity and records is be­ing brought through digi­ti­sa­tion of land records and ef­fec­tive im­ple­men­ta­tion of pro­posed Land Ac­qui­si­tion, Re­ha­bil­i­ta­tion and Re­set­tle­ment Bill 2013 (LARR).

To fur­ther sup­port the in­dus­try to over­come the project de­lays on ac­count of short­age of labour, a na­tional multi-skill pro­gramme called Skill In­dia is pro­posed to be launched. It will pro­vide train­ing and sup­port for tra­di­tional pro­fes­sions like welders, car­pen­ters, ma­sons etc. which was felt as an im­por­tant need in con­struc­tion projects.

While on the one hand bet­ter tax ef­fi­ciency and eased norms for FDIs will en­cour­age the in­vestors to bring more in­flow into real es­tate, on the other hand, mea­sures to marginalise the de­liv­ery and reg­u­la­tory is­sues such as digi­ti­sa­tion of land records and pro­mo­tion of tra­di­tional skills re­quired for con­struc­tion shall as­sure in­vestors of a bet­ter busi­ness en­vi­ron­ment. The au­thor is part­ner and head of real es­tate and con­struc­tion sec­tor, KPMG in In­dia

The first bud­get an­nounced by the new govern­ment has fo­cused on the im­prove­ment of over­all eco­nomic sen­ti­ment to cre­ate re­newed in­vest­ment en­vi­ron­ment in the coun­try. The bud­get clearly aims at boost­ing growth, cre­at­ing jobs and en­hanc­ing wel­fare. A roadmap has been laid for putting In­dia back on the growth tra­jec­tory, with the an­nounce­ments im­pact­ing all – res­i­dents and non-res­i­dent In­dian (NRI) com­mu­ni­ties.

Ac­cord­ing to the World Bank, in the fi­nan­cial year 2013-14, the NRI com­mu­nity across the globe had re­mit­ted US$71 bil­lion back home. Out of the amount re­mit­ted, North Amer­i­can and Gulf coun­tries ac­counted for more than 65% of the amount.

With sta­bil­i­sa­tion of t he econ­omy in these coun­tries, it is ex­pected that the re­mit­tance by NRIs back home will grow by 7% to 8% in the cur­rent fi­nan­cial year.

Real es­tate has been one of the pre­ferred op­tions for NRI in­vestors so far as it pro­vides steady re­turns. In past few years, the re­mit­tances have grown across states such as UP, Bi­har, Ra­jasthan and Kar­nataka along with Ker­ala, Tamil Nadu, Pun­jab and Andhra Pradesh – states that have tra­di­tion­ally been strongholds in terms of re­mit­tances.

Along with in­vest­ments, large cities in these states have seen a steady rise in real es­tate devel­op­ment cre­at­ing large in­vest­ment op­por­tu­ni­ties for NRIs.

There are no spe­cific pro­vi­sions an­nounced in the Bud­get for the In­dian di­as­pora. How­ever, var­i­ous poli­cies an­nounced in the Bud­get would help cre­ate new op­por­tu­ni­ties for over 25 mil­lion strong NRI com­mu­nity to in­vest in the In­dian real es­tate and in­fra­struc­ture mar­ket.

The new poli­cies an­nounced in the Bud­get, such as cre­ation of 100 smart cities will help cre­ate new op­por­tu­ni­ties for the NRI com­mu­nity to en­ter the In­dian real es­tate mar­ket. These smart cities would re­quire an in­vest­ment of US$1.2 bil­lion over the next year from pri­vate in­vestors in In­dia and abroad.

This cap­i­tal would be re­quired for up­grad­ing in­fra­struc­ture in ex­ist­ing cities and cre­at­ing in­fra­struc­ture for new cities. These cities would of­fer new in­no­va­tive con­cepts to the res­i­dents and users, and is likely to at­tract in­vestors from a long-term per­spec­tive.

Tax in­cen­tives for Real Es­tate In­vest­ment Trust ( REIT) and In­fra­struc­ture In­vest­ment Trusts (In­vIT) will cre­ate safe as­set-based in­vest­ment op­por­tu­ni­ties for NRIs in com­mer­cial real es­tate mar­ket and the in­fra­struc­ture sec­tor.

These in­vest­ment trusts would of­fer NRIs with ex­change trad­able units sim­i­lar to listed shares thereby re­duc­ing the com­pli­ca­tions of a phys­i­cal prop­erty pur­chase.

The fi­nance min­is­ter has also pro­posed long-term bonds dedi- cated to af­ford­able hous­ing to be is­sued by banks. These bonds will fur­ther cre­ate an op­por­tu­nity for NRIs who are look­ing to park their funds in the In­dian realty mar­ket.

With over 25 mil­lion In­di­ans re­sid­ing over­seas and the ev­er­in­creas­ing de­mand for semi­skilled work­force, es­pe­cially in GCC coun­tries, the govern­ment’s ini­tia­tive to set-up the Skill In­dia scheme is a wel­come step. It will help train mi­grant work­ers and equip them with the nec­es­sary skills re­quired for their jobs over­seas, thus pro­vid­ing an edge to the In­dian work­force.

The pro­posed amend­ment un­der the tax law to al­low the tax ex­emp­tion from cap­i­tal gains for re-in­vest­ment in ‘one’ res­i­den­tial house, would over­turn var­i­ous court de­ci­sions in the past that al­lowed such ex­emp­tion even where mul­ti­ple flats were bought.

How­ever, this amend­ment is pro­posed to take ef­fect prospec­tively and, there­fore, may not af­fect the in­vest­ments made till the last fi­nan­cial year.

For­eign cur­rency volatil­ity wit­nessed in last two years has eroded the in­vest­ments made by over­seas in­vestors and af­fected the sen­ti­ment of the NRI com­mu­nity. In the past year the bud­getary mea­sures taken for cur­tail­ing the cur­rent ac­count deficit as well as the im­prove­ment in ex­ports have re­sulted in a sta­ble ru­pee.

If this trend con­tin­ues it will cre­ate a sta­ble en­vi­ron­ment for the NRI to in­vest back home.

To at­tract NRI in­vest­ments in In­dia, de­vel­op­ers across cities have launched cus­tomised apart­ments and town­ships suited to their re­quire­ment.

Fur­ther­more, de­vel­op­ers of­fer flex­i­ble schemes such as on­line pay­ments to fa­cil­i­tate the in­vest­ment from over­seas buy­ers.

To help at­tract larger in­vest­ments by NRIs into real es­tate, spe­cific tax sops need to be pro­vided.

The pro­posed amend­ment to the tax law al­low­ing ex­emp­tion for in­vest­ment in only ‘one’ res­i­den­tial house may dis­cour­age rein­vest­ments by NRI; es­pe­cially with re­gard to the fact that the devel­op­ment of smaller houses is in­creas­ing in In­dia.

The pro­posed amend­ment should, there­fore, be con­sid­ered in this light and be rolled back or ap­pro­pri­ately mod­i­fied to adapt to prac­ti­cal chal­lenges.

Be­sides bud­getary pro­vi­sions, the ad­min­is­tra­tive mea­sures to in­crease trans­parency in real es­tate trans­ac­tions like im­ple­men­ta­tion of the real es­tate reg­u­la­tory bill and digi­ti­sa­tion of prop­erty records, will help en­hance the NRI trust quo­tient in the In­dian realty mar­ket.

Over­all, the bud­get may not have had big ticket an­nounce­ments for NRIs, but pol­icy an­nounce­ments will help cre­ate de­mand for res­i­den­tial and com­mer­cial prop­er­ties across In­dia and pro­vide a wide spec­trum of in­vest­ment op­por­tu­ni­ties for NRIs. The au­thor is a part­ner and head of real es­tate and con­struc­tion sec­tor, KPMG in In­dia

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.