FDI: The good samaritan for real estate
The real estate market of the nation is on the brinks with the cost of debt piling up with leaps and bounds.Latest RBI guidelines, which has made real estate lending even more onerous and expensive, have put the realty market on the sick list.- Albeit, banks have always offered a leg up to the Indian real estate, the present condition of the realty market is still in pits. The price of key inputs for real estate growth have ascended by 7% in the present year, a steep rise to 25% compared to last year. In addition to it, cement prices and labor cost have also hit the roof with 7% and 15% respectively.
- The recent DCR amendments have been been in the news lately, since it has triggered the developer’s cost by 15%, inclusive of the fungible premium payable. Under the circumstances, construction cost has shot up by 20%, which is likely be borne by the end-users.
- India has offered a tentative answer to its present matter of contention, by virtue of REMF–Real Estate Mutual Funds,however it did not yield lucrative returns. Indian REIT is leveraged at 20%, in comparison to Hong Kong, Malaysia and Taiwan and around 200% in Korea. This fuels the risk factor to go up and contribute to low yield due to lack of leverage.
- Since, almost all the routes of capital inflow are dammed up because of the risk involved, FDI can only save the neck of real estate in the country. However, the inconsistent policies of FDI and lack of transparency in the system have put the real estate market of the country on a thin ice. In regard to this, a foreign investor who wants to invest in a medium-term of 4-6 years, is hesitant due to the growing uncertainty in the sector.
- Existence of uncertainty in the sector has not been able to make domestic and international real estate investments lose value in the country. Introduction of real estate investments in mid-income housing category (ranging between Rs 50 lakh-Rs 1.5 crore) has struck a chord in the housing sector of the nation.
- The Department of Industrial Policy and Promotion, as an attempt to prop up foreign investments in the country, proposed relaxing of the FDI norms for the housing sector, which includes the allaying of the three-year lock-in period.
- As an attempt to relax the provisions for housing sector, the ministry has proposed a minimum capitalization of USD 5 million for wholly-owned subsidiaries. In a move that bodes well with its new set of changes, the ministry has proposed a reduction in the minimum built-up area of 50000 sq mts to 20000 sq mts of carpet area, during the construction of development projects.
- To put the real estate sector in the right track, a committed regulatory body should be brought into action. In addition to it, 100% FDI in most of the real estate categories should be allowed along with jacking up of the approval process significantly.
- Adequate transparency, using of updated technology for enhanced project implementation and timely delivery from the industry are some of the basic modus operandi, which are likely to make a hit with FDI into Indian real estate.
