Relaxation of FDI norms in Construction: Impact on Realty sector

The Central government has extended a new lease of life to the construction sector by easing Foreign Direct Investment (FDI). This decision was taken by the Union Cabinet on 29 October, 2014 which was welcomed by the construction industry in the hope that it would boost the sector and promote economic growth. It includes reduction in the minimum built-up area for foreign funding as well as capital requirement. This move is expected to garner foreign funding for the development of commercial spaces like malls and office complexes. Besides, the government also provided some reprieve for foreign investors by relaxing norms related to exiting projects as well as repatriating profits.

Incidentally, the government had allowed 100 per cent FDI in construction, conditionally, in the development of townships as well as in housing development projects since 2005. However, the bone of contention that foreign investors had earlier was with regards to conditions imposed by the government related to minimum area requirement as well as exit from projects. The present move by the government has brought the smile back to investors. As per the new norms proposed by the government, the minimum floor area required for FDI in construction has been reduced from 50,000 sq. meters to 20,000 sq. meters. Besides, there is no minimum land requirement for “serviced plots” as opposed to the minimum of 10 hectares that was prevalent earlier.

Impact on Realty

The move to relax the FDI norms in the construction sector is expected to provide the much needed thrust to the realty sector across the country which was reeling from economic crunch in recent times. This was primarily due to rise in construction costs and regulations with regards to obtaining bank funding, imposed by RBI. The move to reduce the minimum floor area for FDI investment will enable foreign investments to flow into construction projects in major cities and urban spaces which was earlier seen more in projects towards the outskirts or in fringe areas. This will facilitate construction activity to be carried out in smaller towns where the requirement for smaller commercial and office spaces is more. In general, the current move by the government is expected to have a multiplier effect on the economy. Besides bringing in more foreign funds, it will enable development of infrastructure, create more jobs as well as facilitate demand for a range of products related to the construction industry particularly in the manufacturing sector. More importantly, it will enable the development of more residential projects, particularly in the affordable range. This will give a further impetus to the government proposal of developing more affordable housing options in striving to fulfill its goal of ‘Housing for all its citizens by 2022’.