Budget 2014: FDI in Real Estate
According to recent budget updates, the minimum capital for FDI has been reduced from US $10 million to US $5 million and the minimum area requirement for all other construction projects other than housing has been reduced to 20,000 sq m built-up area from 50,000 sq m built-up area. In an attempt to promote low-cost housing, government also announced that for the projects in which atleast 30 per cent of the project cost is used for low-cost housing, will be exempted from minimum area and minimum capital requirements.
Foreign Direct Investment (FDI) is an efficient source of funding in Indian real estate today. At present, up to 100 per cent FDI is allowed in the realty sector through the automatic route, subject to fulfilment of certain criteria. For housing plots, the project must have at least 10 hectares. In the case of group housing and other construction development, the project must have at least 20,000 sq. m of built-up area. In case of projects with both housing and any other construction such as for commercial premises, hotels, hospitals etc., the project must have either 10 hectares of land or 20,000 sq. m of built-up area.
The minimum capital to be brought for FDI was US $10 million which is now reduced to US $5 million in the case of wholly-owned subsidiary and US $5 million in case of investing through a joint venture along with a local partner. The investment must be brought within six months of commencement of project and cannot be repatriated till 3 years of capitalisation.
The investors also need to make sure that 50 per cent of the project is completed within five years after getting all the statutory approvals from the government. Foreign investors are also not allowed to sell the plots without basic amenities such as roads, drainage, sewerage, water supply and street lighting. All the above mentioned criteria on capitalisation, area requirements and time frame rules need to be followed in the case of FDI but not in the case of investment from an NRI.
FDI has been a huge success in real estate sector. Since 2005 more than 1500 projects were approved with foreign investors. But due to the underlying criteria, many investors with lesser capital and who are willing to invest in small size projects are not allowed. If these criteria can be rationalised, the overall investment through FDI will increase.
Minimum built-up area requirement should be reduced, the definition of minimum lock-in period should be changed and, lastly, the minimum capitalisation (investment) that is required must also be reduced. These factors will help bring in more investors and thus benefit the realty sector at large.
Foreign Direct Investment in real estate started in 2005. Prior to FDI, only NRI’s and PIO’s were allowed to invest in real estate sector. Foreign investors were only allowed to invest in development of integrated townships and settlements through a wholly-owned subsidiary or through a joint venture company along with a local partner. But currently FDI is permitted in townships, housing, infrastructure and other construction development projects.
