JOIN USThe Government has decided to allow FDI upto 100 per cent under the automatic route in townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) in order to catalyse investment in the vital infrastructural
sector of the economy.
It is expected that allowing investment on the automatic route in the construction and development sector would have a multiplier effect on the economy by construction activities of all types.
This would mean (a) being an employment -intensive sector, it would create employment not only for skilled and unskilled labourers, technicians and artisans, but also for engineers, architects and designers; (b) lead to spin-off benefits to manufacturing sector, particularly construction material industries like cement, steel and brick making; and (c) ensure rapid increase in built-up infrastructure as well as improving the
same.
The real estate industry everywhere, including Bengaluru, is gung-ho about the new announcement that Foreign Direct Investment (FDI) upto 100 per cent is now permitted in the construction development sector. With this rise, developers
expect spin-off effects in terms of higher growth, and better employment, in the real estate sector, among other industries.
The secretary of the Confederation of Real Estate Developers Association of
India (CREDAI), Suresh Hari testifies to the change in mood. He says, “Earlier there were too many restrictions. Foreign investment could not exceed a limit.
Now with the announcement of 100 per cent FDI, things are set to change. Smaller
developers get greater access to the real estate market and can develop space of 20,000 sq. metres as against the older minimum of 50,000 sq. metres; small funds like three to five million dollars can be brought in as against the older minimum of 10 million dollars. This automatically spurs investment and a whole set of dormant real estate players can also work, alongside the biggies in the market.”
Most developers in Bengaluru, says Suresh, are happy about the new development and are keenly awaiting formalities to be completed following the induction of new ministers in the Union Cabinet.
Builders believe that there is continuous and consistent movement and drive in this government’s recent initiatives. Additionally, guarantee of safe and responsive atmosphereis persuading builders to up their plans on new investment.
Suresh Kris, CFO, Brigade Enterprises Ltd welcomes the new thrust and energy shown by the government. “The relaxed norms are a welcome move for the real estate industry, which is cash-strapped. Developers who have small land parcels that did not qualify for foreign investment till now would benefit from this move. Foreign investors who were not keen to invest in larger projects may now start investing in smaller projects,” he opines.
He also believes that doing away with the clause of 50 per cent development to be undertaken in five years from the date of approval and the restriction of three-year lock in period gives the existing foreign investors a lot of room to exit
current investments.
They can now re-jig their portfolio, and many developers - small and big - would benefit from such an exercise.
Kailash Advani, CEO, Vaswani Group believes relaxed FDI would allow multiple interventions, especially from the medium to small investors. He explains, “The
lowered qualifying thresholds for land, constructed area and investment would enable more medium-sized players to take up large projects with the help of foreign investors.
Given the currently-estimated shortage of 20 million dwelling units in urban clusters, the introduction of a further relaxation in the FDI norms for ‘affordable housing’ and the Economically Weaker Sections (EWS) category, would encourage development in this category, which is the need of the hour.”
The proposed development of the 100 Smart Cities requires humongous amounts of funding, and offers exciting opportunities for foreign funding to enter the market through the FDI route. While some grey areas still exist, says Kailash, there is finally a government that acknowledges the multiplier effect that real estate has on job creation and GDP growth.
Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield believes the approval of 100 per cent FDI in construction will boost the 100 Smart Cities project. Relaxation in the development size will benefit Tier II and III cities where large projects, typically , suffer from poor demand.
Further, locations around the Golden Quadrilateral and DMIC can also look at reaping benefits out of this as new FDI will also be attracted to new towns and cities planned in these corridors.
Keeping in mind the fact that the proposal is more attractive now, it will help attract investment in the sector from funds that want to limit their exposure. “However, the government would have to ensure that the process of acquisition and approval on real estate and construction projects is streamlined to ensure minimum delays to make the environment more conducive for global investors. So far, one of the main concerns has been the delays in commencement and completion of projects in India,” Sanjay reckons.
There is already an improvement in FDI in construction this year with a number of foreign sovereign and pension funds already committing funds to Indian real estate not only through fund managers, but also through direct agreements with local developers in projects, clearly indicating higher confidence in Indian real estate markets. The total FDI in the construction and development sector was recorded at USD 0.6 billion during
January – June 2014, a 58 per cent increase from the same period in 2013.
According to Bijay Agarwal, chairman and MD, Salarpuria Sattva Group, the move is much-awaited, as the real estate industry needs huge resources to meet the massive need for housing in India.
Many foreign investors with medium scale investment capabilities have been
interested to invest in India. He avers, “With the new government, a larger number of medium investors’ contribution to the industry can amount to much more than fewer players with large investment capabilities, giving the right impetus to housing development in India.”
Everybody seems to maintain that the affordable housing segment is going to gain immensely and the realisation of the vision of housing for all by 2022 can
definitely be a possibility. Bijay adds, “We have still to wait to see the implementation of this new announcement. But we are confident that this move will bring a sea change to the process of fund-raising for the industry. Clarity in the new norms of FDI will bring discipline and reduce ambiguous interpretations, leading to a fair investment opportunity. Overall, the new law ensures adequate safety for investors, raising their confidence.” Only time will tell how this story turns out in relaity.