What Narendra Modi Can Learn From China's Real Estate

Wang Jianlin, the Chairman of leading Chinese real estate player Dalian Wanda Group met Narendra Modi to express his desire to invest $ 10 billion in retail and industrial townships in India. Jianlin's plan would materialize if the Indian government offers him enough incentives to invest in property in India.

The government has been trying to give incentives for foreign investors in real estate in the recent past. Earlier the Narendra Modi government had eased restrictions on foreign investment in real estate in India. In October 2014, the government lowered the minimum built-up area requirement for FDI in construction projects from 50,000 sq ft to 20,000 sq ft.

The government also lowered the minimum capital requirement from $10 million to $5 million. Recently, the Union Cabinet approved certain amendments to treat NRI investments in real estate on par with domestic investments, removing restrictions on them. The government also allowed foreign investment in REITs investing in rent yielding assets and retail space.  But, still such incentives are not enough. Restrictions on building in China are far less, and Chinese real estate investors are surprised when they invest abroad.

To understand what this means, let us compare Shanghai and Mumbai. India and China are vastly populated countries. Shanghai and Mumbai are vastly populated too. In Mumbai, the living space per person is 4.5 sq mt. People would not find this surprising because since 1951, Mumbai's population has grown from 2.96 million to over 20 million today. But, rising population need not lead to greater congestion in living spaces.

If building stock rises faster than population, living space would rise too. Real estate developers merely have to add additional floor space in buildings, by building taller buildings. In Shanghai, the most populated Chinese city, floor area per person in 1984 was merely 3.6 sq mt. But, in 2010, it had risen to 34 sq mt per person. But, in this period, Shanghai's population had grown from over 12 million to 23 million. In 1984, Shanghai made raising floor space a priority. Indian cities never did.

Restrictions on building height are among the lowest in China. To allow greater foreign investment in real estate and to allow Chinese-style skyscrapers being built in Indian cities, Narendra Modi government should repeal such restrictions instead of instituting piecemeal reforms.