|
FDI in India's Real Estate Sector: A Constructive Move
Ananth Srinivas analyses the government's decision to allow 100 per cent foreign investment in the construction and real estate development sector.
With the Indian government substantially easing foreign direct
investment norms (FDI) in the construction and real estate development
sector, chances of the sector attracting big time foreign investment
have improved dramatically. Earlier, foreign investments were allowed
to a certain extent only in integrated townships. The Cabinet Committee
on Economic Affairs (CCEA) has now decided to permit 100 per cent FDI
in all types of housing, commercial premises, hotels, resorts,
hospitals, educational institutions, recreational facilities, city and
regional level infrastructure in a bid to attract higher foreign
investment.
Some of the key highlights of the government policy include:
- Foreign Direct Investment in the sector to
be permitted under the automatic route.
- Minimum area to be developed for each project has been reduced to
25 acres from 100 acres.
- The earlier requirement of a minimum of 2,000 dwelling units for
serviced housing plots has been changed to a minimum built-up area of
50,000 sq.metres.
- Minimum capital investment for wholly owned subsidiaries now
stands at US $10 million.
- For joint ventures, the minimum capital investment is US $ 5
million.
- Original investment can be fully repatriated after three years.
- Sale of undeveloped land is barred to prevent speculation in real
estate.
 FDI in this sector no longer requires mandatory approval from the
Foreign Investment Promotion
Board (FIPB). The CCEA has also agreed to delegate the power of
approval of individual construction projects with FDI component to the
local government authorities. These projects shall have to conform to
the norms and standards, including land use requirements and provision
of community amenities and common facilities as laid down in the
applicable building control
regulations, by-laws, rules and other regulations of the State
Governments or municipal bodies or other concerned local bodies. The
move is expected to have a "multiplier effect on the economy", minister
of commerce and industries Kamal Nath has said. It would create
employment for skilled and unskilled labour, technicians, artisans and
also engineers, architects and designers, feels the minister.
China attracts nearly 30 per cent of foreign investment through real
estate, and thus opening up of foreign investment in real estate is a
step which will stimulate economic growth, the minister has said. The
Indian economy, Asia's fourth largest, is expected to expand 6.9 per
cent in the current year through March and construction activity has
risen as consumers are taking advantage of three-decade low interest
rates for construction of houses and apartments. The easier norms
are expected to boost employment and spur demand for cement, steel and
other manufacturing industries as construction activity picks up steam.
Some Concerns
Permitting FDI in real estate is a step in the
right direction. We need good quality infrastructure in the country to
compete with developed countries. Surely, there will be a multiplier
effect on the
economy and will boost employment in a variety of sectors. Foreign
investment was earlier permitted only in
Software Technology Parks and Housing townships. That was insufficient
to attract significant investment. Whether the new policy allows
foreign companies to
acquire Indian companies to start their venture remains to be seen.
However, the requirement of acquisition of 25 acres of land is a
bottleneck. This would mean spiraling real estate costs in the suburbs
since none of the cities in India offer 25 acres of free-hold land in
the Central Business Districts. If suburban properties become more
expensive in the future, the purpose of liberalising the real estate
sector would be defeated. The government is expected to allow FDI in
retail
as well and this would provide a further boost to the initiative.
Besides, the creation of Real Estate Funds or REITs in India is also
expected to become a reality soon.
Potential pitfalls
There is a danger of indiscriminate real estate development due to the
easy approval process. The new policy talks about permitting foreign
developers to develop large-scale properties. However, the problem with
all Indian cities is haphazard town-planning and a dubious building
approval process. What is needed is a Regulatory Authority that
facilitates infrastructure development in consonance with sound
town-planning and construction regulations. There is also a likelihood
of an 'oversupply' situation developing in some areas such as office
space for IT companies. Given the high return on rent income, IT office
parks would attract more investment than a typical commercial building.
If the supply is not in tandem with demand, it could lead to mismatched
development. A tax holiday scheme for companies that do not
repatriate their income would also be a welcome move.
[Ananth Srinivas is Senior Manager, Marketing, with Cordys Asia, based in Hyderabad, India.
7 April 2005]
|
