Recent changes in realty unlikely to bring in more FDI: Fitch

Says investment flows likely to remain slow in near term due to project delays and long approval process

The recent changes made by the government in foreign direct investment (FDI) in real estate is unlikely to increase the inflow into the sector in the near term, said Fitch Ratings.

“The Indian real estate sector has been challenged by frequent delays in project completion and a long/complex approval process. The weak demand in recent times has added to the challenges. With these issues continuing to impact the sector, we believe that investment flows will remain slow and limited to a few select projects in the next 12 months,” Fitch said.

The Union government recently removed the conditions for FDI in real estate such as minimum investments, minimum area and exit options for the investor.

Investment flows in to the real estate sector have slowed down over the last 18 months, it said. FDI in so called construction-development projects fell by over 38 per cent during the year ending March 2015 (FY15) to $ 758 million as compared to $ 1,226m in FY2014.. The FDI flow has remained weak this year with just $34 million of investments in 1QFY16., it said.

"We expect the investments to pick up over the next two to three years along with the expected improvement in demand in the real estate sector. Furthermore, the easier exit options allowing FDI investors to cash out after a lock-in period of three years without linking them to any execution delays and ability to invest in completed projects may improve the appetite of investors," it said.

Fitch expects FDI investments to reach about $ 1.5bn annually over the next two to three years.

The increase in FDI is likely to bring more transparency in the Indian real estate sector, while also resulting in more timely completion of projects and improved construction quality with access to better technologies, it said..

The affordable housing segment has so far witnessed a weak response from developers and fewer completed projects, notwithstanding the government focus and the potential for the sector to benefit from the easing of FDI policy, it said

"We do not expect meaningful foreign investment flows into this segment until investors are better able to assess the risks unique to this segment, and this will require a significant increase in the number of completed projects," it said.