Pre Budget Analysis: How The Modi Government Liberalized FDI in the Real Estate Sector

The NDA government presents its second Budget tomorrow. In the Union Budget 2014-2015 presented in July 2014,  the BJP led ruling coalition had proposed liberalising the norms governing Foreign Direct Investment (FDI) in real estate. A day ahead of its second Budget for the fiscal year 2015-16, PropTiger.com reviews the reforms introduced by the government, but first, a look at the FDI inflows since 2013:

The FDI inflows into India in December 2014 touched 2.16 billion US dollars, nearly twice the figure of 1.10 billion US dollars in December 2013. The construction industry attracted the second highest FDI equity inflows in comparison to other sectors. The cumulative FDI equity inflows into the construction industry also stayed strong at 914 million US dollars in April-December 2013, but dropped a year later in April-December 2014 to 707 million US dollars.  Analysts point out that the political uncertainty and series of scams unearthed in the last few years had hurt the investment climate.

[caption id="" align="aligncenter" width="567"] With the majority NDA government in power, much optimism for FDI in real estate has returned with high hopes pinned on Union Budget 2015-16 (Picture Credit: Wikimedia.org)[/caption]

With a majority government in power, much optimism for investments in India has returned with high hopes pinned on Union Budget 2015-16. PropTiger.com analyses the reforms that are leading the upbeat outlook on FDI in real estate:

1. In October 2014, following the Union Budget 2014-15 announcement, the government brought down the built-up area requirement for FDI in construction projects from 50,000 to 20,000 sq mt. The government also lowered the minimum capital requirement from 10 to 5 million dollars. This facilitates easier and cheaper investments from foreign investors in real estate in India. Many real estate players agree that the norms on built-up area and capital requirement were the major constraints foreign investors faced as they block the flow of equity capital into low cost projects. Easing of norms on capital will also drive foreign investors with less money to invest in housing projects in smaller cities across the country. This is set to boost affordable housing in Tier-2 and Tier-3 cities. 

2. In August 2014, the Securities and Exchange Board of India (SEBI) approved setting up of Real Estate Investment Trusts (REITs) and proposed tax cuts for them and other similar infrastructure trusts. The formation of REITs will bring about more professional and transparent practices in the real estate industry encouraging small investors and global investors to invest more in the sector.  To read more on the benefits of REITs, read here.

3. The government also approved the proposal to allow the transfer of property from a non-resident investor to another, and the repatriation of the sales proceeds of property before the completion of the ongoing projects in India. Such easing of norms will facilitate more FDI in the sector as foreign investors now have an exit option before the completion of a construction project. However, analysts believe that lack of clarity in defining what might constitute the completion of a construction project, can make it risky for foreign investors to invest.

4. The government also decided to do away with the three year lock-in period by permitting foreign investors to exit the project after the development of trunk infrastructure. The trunk infrastructure includes water supply, the roads, street lighting, drainage and sewerage. This might make small, short-term projects more feasible.

5. The government also exempted the projects which invest at least 30 percent of the project cost in low cost affordable housing from the norms governing FDI and minimum area requirement. Such exemptions are likely to spur more foreign capital inflows into the mid-income housing market. This is also likely to make joint ventures more commercially feasible, and the completion and the management of projects easier. Some argue that allowing more FDI will raise the price of real estate by investing more in the economy. But, it is obvious that more investment will raise the supply of housing, lowering the prices, making housing far more affordable than it ever was.