What More Foreign Investment In Residential Rental Property Would Mean

The Union Cabinet has approved a proposal to allow foreign investment in real estate in India on May 6, 2015. This will allow foreign investors to invest in REITs that are likely to invest in rent-yielding office and retail space. Earlier, they could invest only in under-construction commercial property in India. But, in India, REITs are still not allowed to invest in residential property in India. Even now, corporations do not rent out residential property in India. This has not changed. In some countries like Finland, at least 80% of the assets of REITs should be invested in residential assets.

Why large corporations and foreign investors do not invest in residential property in India? How would tenants, investors and corporations benefit from corporatization of renting or foreign investment?

1. Rental contracts are not often legally valid or professionally handled. This often leads to weaker property rights for tenants and landlords. It would also lower the cost of finding rentable property. With corporatization of renting and foreign investment, there will be more professional rent contracts.

2. Rent contracts would solve many other problems. Tenants often find it costly to move to a new home when a contract ends abruptly. Tenants might overstay against the wishes of the landlord. Landlords find that their property is at the risk of expropriation when they rent out to legal savvy people or to senior citizens. If such cases are resolved in courts, it might take up to decades.

3. Even though management of firms is much better in developed countries, according to a study of thousands of firms in 17 countries, management practices of multinational firms are of first-world standards everywhere. With foreign investment, firms which own rent-yielding residential assets would ensure that utilities are working properly. At present, landlords do not do a good job in handling such matters. Tenants will also be able to make landlords more accountable. The standards management of homes that could be rented out would rise to global levels.

4. There would be more international risk sharing. People have a strong preference for investing in domestic assets. This is especially true of residential property. But, capital needs to be diverted to residential projects where they are more valuable. Moreover, when a foreign investor invests in residential property in India and when Indian investors invest in residential rental property abroad, there is adequate sharing of risk. When people directly own residential property, the preference for investing in domestic property would be more difficult to avoid. So, for people to invest in residential property abroad, professional or multinational firms should raise capital by issuing securities to investors in India and abroad. If REITs are allowed to invest in residential assets, this would happen.

Read more on how eased MAT norms might allow REITs to flourish in India. Read our post simplifying REITs too.