New investment avenues for NRIs
The 100 smart cities and REITS proposals present new investment opportunities
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