How new FDI norms can help transform India’s real estate industry

The recent announcement by the government relaxing foreign direct investment norms for Indian construction and real estate sector comes as a shot in the arm for builders and developers. Though FDI in real estate has been allowed since 2005, the rules and regulations related to the size of investment, lock-in period and exit routes had so far restricted the free flow of capital.

Over the past few years, the flow of FDI in India’s real estate has been on a decline. During the current fiscal year until August, India received FDI inflows worth $17.4 billion, which is 70% of the total inflows received during the entire fiscal year of 2013-14. However, FDI inflows received by the construction, housing and real estate segment have lagged behind. The new rules aim to rectify this anomaly by creating appropriate investment architecture for attracting FDI.

The easing of FDI norms is therefore significant as it will provide an alternative route of funding for projects in construction and real estate development. These being very capital intensive activities, relaxing the FDI norms will help the players to address issues of liquidity constraints, which have posed a major challenge for even some of the leading developers.

In particular, the decision to reduce the minimum built-up area requirement for FDI in construction projects to 20,000 sq. meters from 50,000 sq. meters and lowering the need for minimum capital requirement to $5 million from $10 million will allow many projects to qualify for FDI through automatic route (no FIPB clearance will be required). The sectoral conditions of minimum area and capital will not apply if the developer sets aside 30% of the project for affordable housing, defined as dwelling units of less than 60 sq. m.

Among the other investor-friendly decisions are removal of the clause stipulating a minimum land requirement of 10 hectares for development of serviced plots; allowing an investor to bring in successive tranches of FDI till the period of ten years from the commencement of the project or before its completion; permitting foreign investors to repatriate investments and exit on completion of the project after three years. In this regard the modalities related to the date of final investment and the guidelines on development of trunk infrastructure are under consideration and formalization.

By creating an enabling regulatory framework for FDI to operate seamlessly in Indian real estate, the sector stands a good chance of experiencing a transformation through the introduction of global best practices into the system and more efficient, transparent and time-bound processes.

Among the key benefits to accrue from greater FDI in the sector would be an increase in the available housing stock, including affordable housing, and the development of smart cities as envisaged by the government. Under the new rules, developers will be encouraged to take up smaller projects in urban areas where the availability of land is limited. With FDI funding at their disposal, the risk of delay in smaller projects will be reduced leading to their fast and cost-effective completion, which would further advance the government’s vision of ‘Housing for all by 2022‘.

Studies show that FDI triggers technology spillovers, assists human capital formation and contributes to creating a more competitive business environment and efficient use of resources. All of these are important factors to be harnessed for development of smart cities in India. By facilitating the introduction of new technology and know-how, FDI in Indian construction and real estate sector can help spread the adoption of “cleaner” and “greener” technologies for improving environmental and social conditions within the industry and among urban communities.

All of these developments would become catalysts for higher economic growth, which is the most potent tool for alleviating poverty and generating jobs. Apart from infrastructure creation, substantial employment and income generation over the entire spectrum from unskilled workers to engineers, architects, designers as well as financial and other supporting services, investments in the sector also create demand for products in related industries like cement and steel.

P Sahel, Vice Chairman, Lotus Greens Developers Private Limited

The views expressed in this article are author´s own.