Foreign Direct Investment in Indian real estate sector
Market Gloom
The real estate industry in India has been going through a lean phase for quite a while now. Housing stocks lay unsold in cities like Mumbai, which has been termed as Mecca of Indian real estate for a long time. Developers are bogged down by sluggish sales and high interest rates.
As the real estate sector goes through a lean phase, the overall Indian economy has been troubled by slow economic growth, too. 8% GDP growth is a thing of the past now and the projected slowdown in overall economic growth globally, and particularly in India, 6.5% in 2011-12 , has pushed the government to go for reforms on the economic front.
Real estate is the fourth largest sector in terms of foreign direct investment (FDI) inflows in the country. According to the department of industrial production and policy report, the FDI inflows in the housing and real estate sector received USD 2935 million, USD 1227 million and USD 731 million in the years 2009-2010, 2010-2011 and 2011-2012 respectively. The decline is due to the unfavorable economic environment in the US and euro zone and the sector is in need of foreign inflows.
FDI in retail
The recent decision of the government to allow FDI in the multi-brand retail sector is expected to help the real estate sector in the country. The market sentiment has witnessed a significant development since. At one hand, it is expected to usher in a new era for the commercial real estate in the country, with foreign players entering the Indian retail market with the much needed investment. Along side, the residential sector is also cheerful of the impending inflows.
RBI incentive
The recent announcement by the Reserve Bank of India (RBI) of strong growth in the service sector in 2011-12 has brought cheer to the real estate developers as well, as it may sustain the present high demand of commercial real estate in the near future. As the demand for office space continues to be strong, it is estimated that fresh jobs will be created in the country to exert a strong growth.
As per the thumb rule, when a company takes 1,000 sq feet of office space on rent, it employs around seven people. Of the seven new people entering the job market, five out of them will buy residential apartments, on an average. Hence, the market estimates an increase of five times in the requirement of residential space of that of the commercial space used. With the commercial space remaining strong, it will also continue to give a boost to the residential real estate.
FDI: A remedy in need
The decision is expected to achieve consequences beyond bailing out the cash trapped retailers. The real estate industry believes that the inflow will open up immense opportunities in the long term, as the demand for quality real estate will rise.
The new international entrants will be willing to long term risks and invest in stores which will be sustainable over a longer period. Competition will increase and Indian retail industry will expand to areas hitherto it has not been able to. All this will create a window for expansion for residential real estate sector in small cities that are growing.
