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With new FDI rules, relief in sight for realtors

The move has the potential to double foreign inflows into housing and commercial real estate, but high inventory could scuttle the possibilities

Mansi Taneja  |  New Delhi 

The liberalised norms for foreign investment could be a boon for affordable housing

The recently-concluded festival season proved a damp squib for real estate developers. In spite of hefty advertising and promotion, sales didn't pick up. Many developers were hoping to offload some parts of the huge inventory they are stuck with, but their efforts came to naught. The only cheer came towards the end of the month when the government liberalised norms for foreign direct investment in the sector. Among other things, the minimum built-up area required to get a foreign investor into a project was slashed from 50,000 square metres to 20,000 square metres, and the project size was halved to $5 million. Under the rules, 100 per cent foreign investment is allowed in real estate projects.

This will provide relief to the sector which is plagued with massive unsold stock, sluggish sales, resource crunch, debt, buyer activism and insufficient regulation. Here's how the sector got caught in a vicious cycle of debt. Thanks to under-regulation, many developers have used money raised for one project to buy land for another. These overenthusiastic serial developers have caused a glut in the market (see Property for sale). With new sales coming to a standstill - a result of the economic slowdown coupled with high interest rates -, most of them face a severe shortage of resources. Banks have turned off the tap because of the perceived risk of default. Many developers are known to be raising money from private sources at exorbitant rates to keep the show going. This is where the liberalisation of the norms could help.

Naturally, developers have welcomed the government's move. "The permission to sell completed projects to foreign investors will help Indian real estate developers get the much needed liquidity into the system," says Unitech Managing Director Sanjay Chandra. "The lack of project financing has been holding back the real estate sector for a very long time. Besides revitalising the existing housing market in and around urban agglomerations, this decision is likely to encourage investments in new geographies," adds Tata Housing Managing Director & CEO Brotin Banerjee. Navin Raheja, the chairman of Naredco, a real estate association, says the relaxation of norms has the potential to more than double foreign inflows into housing, commercial real estate, hotels and townships over the next one year.

From boom to bust

The decision has come at a time when foreign investment in real estate has turned into a trickle. The sector had received about $22 billion in 2000-2013, almost 11 per cent of the total foreign direct investment into the country during the period. Those were the years of an unprecedented boom in real estate. But once it transited from a sellers' market to a buyers' market, the foreign investors began to lose their appetite. As a result, foreign investment in the sector has slowed drastically since 2012. It fell from $3.1 billion in 2011-12 to $1.3 billion in 2012-13 and $1.2 billion in 2013-14. During April-August of the current financial year, $446 million has flowed into the sector.

Will the recent changes make the sector attractive to foreign investors? The evidence is mixed. Some analysts feel that unless the inventory gets cleared, they might not be interested. The fundamentals of the market have not improved in any way. Foreign investors could also be looking for some clarity on a regulator for the sector. The talk of such a regulator has been doing the rounds for quite some time. After much deliberation, the United Progressive Alliance government had introduced the Real Estate (Regulation and Development) Bill in the Rajya Sabha last year. The view of the current National Democratic Alliance government on it is not very clear. But it is unlikely that it will see the light of the day anytime soon. Meanwhile, Maharashtra is all set to become the first state in the country to have a regulator for the housing sector: the Housing Regulatory Authority. A search committee headed by the chief secretary of the state will suggest names for the chairman and members of the authority. The increased buyer activism, as was seen in the case of Supertech and DLF, too bothers foreign investors.

On the positive side, the distress in the sector will fetch deals at bargain basement prices. "Many (foreign players and funds) will start evaluating India as a potential investment destination. But foreign investment won't start flowing in immediately. We will see many large deals happening in this space within the next three or four quarters," a senior executive of a private equity fund says.

One aspect everybody agrees on is that it will help the government's ambitious programme to set up smart cities and give a boost to affordable housing. "It will go a long way in making the affordable segment more viable for developers," says Banerjee of Tata Housing. Many small and mid-sized builders will now find foreign capital accessible.

Under the relaxed norms for FDI, projects which commit at least 30 per cent of the total cost for low-cost affordable housing would be exempted from minimum built up area and capitalisation requirements with a three-year lock in. According to the revised norms, projects with at least 60 per cent of the FAR/FSI (floor area ratio/floor space index) for units of carpet area not over 60 square metre will be considered as affordable housing projects. Also, 35 per cent of the total number of units should be constructed with carpet area of 21-27 square metre for the economically weaker sections. Such projects can have a mix of dwelling and commercial units. However, a servant's quarter that comes along with a high-end unit cannot be separately counted as a low-cost dwelling unit in an affordable housing project.

Some developers point out that what comes in the way of low-cost housing is the sky-high price of land. And the new norms do little to address that. "In a city like Gurgaon, nobody can buy land to build inexpensive houses. For such projects, you have to go far away. But the transport infrastructure is such that people can't live there and come for work to Gurgaon effortlessly," says a developer with substantial interests in the Delhi suburb.

At the moment, the industry is happy with the new concession. Real estate consultancy CBRE's South Asia Chairman & Managing Director Anshuman Magazine says: "The real estate and infrastructure industry is starved of funds. This announcement will widen the base of investors, especially mid-sized financial institutions. It will also encourage new development projects in prime areas of large cities and in Tier II towns."

First Published: Tue, November 11 2014. 22:30 IST