Realty realities

The government's move to allow foreign direct investment in all real estate projects makes sense, given the fact that the country requires huge funds for property development.

The present policy of allowing FDI in only integrated township development has not had the desired result, as is evident from the fact that only three proposals have come to the Foreign Investment Promotion Board in the last four years.

Reason: the liberalisation was half-hearted and the 100 per cent FDI came with a huge string attached.

For example, the minimum lock-in period of three years before the original investment can be repatriated, and a project completion mandate that a minimum of 50 per cent must be completed within five years of possession of land.

There also seems to be no logic for the 100-acre minimum area norm for allowing FDI in township construction. Considering that vacant land of such magnitude is difficult to get in Indian cities, the norm is out of line with the market.

To be fair, successive governments have done quite a lot for removing the anomalies plaguing the real estate sector.

In the past, archaic regulations, unclear titles, low user charges, constrained mortgage finance and lack of quality standards have been the barriers to real estate development in India.

But with reforms such as repealing of the urban land ceiling law and modification of the rent control law, the realty sector now has the potential to witness rapid growth.

That explains why a Chesterton Meghraj study has shown why it makes sense for foreign investors to come to India in large numbers. The yields on investment in both the commercial and residential sectors are currently the highest in Asia.

For instance, the yield rates for commercial space in cities like Bangalore and Mumbai are 10"�12 per cent compared to 9.6 per cent in Beijing and 5"�5.5 per cent in Singapore. The average internal rate of return on capital in India has been estimated at a handsome 30 per cent and more.

Yet while China attracts about 3.2 per cent of its gross domestic product as FDI in its real estate sector, India draws a paltry 1.1 per cent.

This is a pity, considering that there is a gap of 30 million units between demand and supply for housing. It is obvious that allowing 100 per cent FDI alone will not by itself solve the problem, much more is needed.

The government needs to address concerns about high property taxes and stamp duties. The average stamp duty in India is 10 per cent, against 2 per cent globally. Land costs are disproportionately high in India because of the rigidities and cartelisation that are evident in the market.

The reluctance of state governments to focus on projects like development of the surplus land of the Mumbai Port Trust and of sick public sector firms has been a disappointment, and points to the reason for a scarcity-driven land market that in turn takes housing out of the reach of many.