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Real Estate FDI

 

India of today can be acknowledged as the one of the fastest growing economy in the world and in this current economic status, real estate has emerged as one of the most appealing investment areas for domestic as well as foreign investors. And this high growth curve in the real estate sector owes some credit to a booming economy and liberalized Foreign Direct Investments (FDI) regime in the real estate sector.

 
 

The Government of India in March 2005 amended existing norms to allow 100 per cent FDI in the construction business. This liberalization act cleared the path for foreign investment to meet the demand into development of the commercial and residential real estate sectors. It has also encouraged several large financial firms and private equity funds to launch exclusive funds targeting the Indian real estate sector.

 

Until now, only Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were permitted to invest in the housing and the real estate sectors. Foreign investors other than NRIs were allowed to invest only in development of integrated townships and settlements either through a wholly owned subsidiary or through a joint venture company in India along with a local partner.

 

Some of the foreign players who have already tied up with Indian real estate developers are Lee Kim Tah Holdings, CESMA International Pvt Ltd., Evan Lim, and Keppel Land from Singapore, Salim Group from Indonesia, Edaw Ltd., from USA, Emaar Group from Dubai, IJM, Ho Hup Construction Co., from Malaysia etc.

 

Indian Real estate is on the high growth path
In 2003-04, India received total FDI inflow of US$ 2.70 billion, of which only 4.5% was committed to real estate sector. In 2004-05 this increased to US$ 3.75 billion of which, the real estate shares was 10.6%.

 

However, in 2005-06, while total FDIs in India were estimated at US$ 5.46 billion, the real estate share in them was around 16%. The Study, nevertheless projects that in 2006-07, total FDIs will touch about US$ 8 billion in which the real estate share is estimated to be about 26.5%.

 
Source: ASSOCHAM report
 

Guidelines for FDI application in Indian real estate
The Government of India has set up certain guidelines for investors willing to apply in FDI in real estate, which have conditions like area, investment options and target for completion of a project.

 
1. Minimum area
 
In case of development of serviced housing plots, 10 hectares (25 acres)
In case of construction-development projects, built-up area of 50,000 sq m.
In case of a combination project, any of the above two conditions
2. Investment
 
Minimum capitalization
For wholly owned subsidiaries - US$ 10 million
For JV with Indian partners - US$ 5 million–, to be brought in within 6 months of commencement of business
Original investment cannot be repatriated before a period of three years from completion of capitalization.
The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB).
3. Time frame & rules
 
At least 50 per cent of the project to be developed within five years from the date of obtaining all statutory clearances.
Investor cannot sell undeveloped plots - where roads, water supply, street lighting, drainage, sewerage and other conveniences are not available.
 

REMF And REIT

One of the most anticipated promises for the Indian real estate sector, which in turn will benefit developments of hotels, has been the entry of Real Estate Mutual Funds (REMFs) or Real Estate Investment Trusts (REITs).

 

Industry experts believe that REMFS and REITS will definitely ensure more availability of funds to the developers and faster growth of real estate sector. A few real estate entities like HDFC Real Estate Fund, ICICI-Tishman Speyer, Ascendas India IT Park Fund, Kotak Mahindra Realty Fund, IDFC, and Edelweiss Capital have received approval and started investing in real estate.

 

FDI in Indian Real Estate and Economic Growth
With this change in the government policy on FDI, all real estate sectors, residential, commercial and retail are currently witnessing huge growth in demand. India, during the first half of 2005-06 fiscal has attracted more than three times foreign investment at US$ 7.96 billion during making it amongst the "dominant host countries" for FDI in Asia and the Pacific (APAC).

 

India in the next five-year period is estimated to require investments worth US $ 25 billion with the urban housing sector. This again has opened up opportunities for foreign investments in the realty sector. The Central government allowed up to 100% FDI for setting up townships in 2002. However, the flow of FDI investments has been thwarted by the 100 acre criterion; since acquiring such a large chunk of land was impossible in metropolitan cities and even satellite cities and state capitals.

 

But a landmark decision taken by the Union government in 2005, where the minimum land area for development by foreign investors was lowered from the earlier floor of 100 acres to 25 acres has thrown open the lucrative parts of the Indian realty market to global investors. Another perceptible spin-off of the easing of FDI policies will be the impact on quality and inevitable acceleration in construction activities.

 

Foreign Direct Investments in the Real Estate Sector in India would also contribute towards making the sector more organized. Besides increasing professionalism in the sector, it would bring in advanced technology and help in the creation of healthy and competitive market environment for both domestic and foreign investors.