The current state of the Indian real estate sector can be gauged from the fact that while the net profit of the country’s top home financer – HDFC – had never been higher, that for the country’s biggest real estate developer – DLF – is just a fraction of what it was a decade back. And while the government is doing its bit to help the sector by easing FDI norms, the question is whether it has made any difference on the ground. The Dollar Business investigates.

The Dollar Business bureau | September 2015 Issue 

In a written reply to a question raised in the Lok Sabha, Urban Housing and Poverty Alleviation Minister Venkaiah Naidu, more than a year back, had said, “Out of the total urban housing shortage of 18.78 million, 10.55 million was in economically weaker section category, 7.41 million in lower-income groups category and the remaining 0.82 million in the middle-income and above category.” Naidu’s statement, more than anything else, sums up the state of the housing sector in the country. While developers are sitting on huge unsold inventory, prices continue to remain way out of reach of the aam aadmi. In fact, real estate, probably, is the only sector in the country, which has defied all basic economic principles. For, while there is massive demand and enough supply, they never seem to arrive at an equilibrium. And while the government is trying its best to invite FDI into most sectors in the country, and FDI has, in many sectors, brought in a lot of positives, any such luck has defied the real estate sector. The reason? Complex rules and regulations.

Half baked

Just how cagey India continues to be about FDI in real estate can be gauged from the fact that ‘real estate business’, by which the government means “dealing in land and immovable property with a view to earning profit or earning income therefrom”, continues to be under the prohibited list! Given this, it’s no surprise that even though India opened up to FDI in real estate a decade back, it couldn’t change the fortunes of the sector. And one of the main reasons behind it was too many restrictions and regulations. Though some of them have been weeded out over the years, quite a few still remain.

For example, the current Consolidated FDI Policy released by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, GoI, reads, “Minimum area to be developed under each project would be, in case of construction-development projects, a minimum floor area of 20,000 square metre.” Similarly, the policy, under Section 6.2.11.2 (B), reads, “Investee company will be required to bring minimum FDI of $5 million within six months of commencement of the project. The commencement of the project will be the date of approval of the building plan/lay out plan by the relevant statutory authority. Subsequent tranches of FDI can be brought till the period of ten years from the commencement of the project or before the completion of project, whichever expires earlier.”

The real question then is, given these kind of restrictions, why would serious foreign investors bring in FDI into the country? And they haven’t! For, after hitting an all-time high of just under $2.2 billion in FY2010, which represented almost 9.8% of India’s total FDI inflows that year, they have been continuously falling. According to a report by Cushman & Wakefield, “Post FY2010, FDI inflows in Indian real estate declined significantly, as global players became unsure about the potential of Indian real estate sector considering the subdued demand, prevailing regulations and cumbersome procedures.”

Finding keys

One of the main reasons behind India not attracting enough FDI is complicated exit options. For until it was removed earlier this year, there was a three-year lock-in period for FDI. So, has the removal of the lock-in period helped? “The removal of the three-year lock-in provision gives flexibility to an investor. However, since real estate projects are of longer horizon, expectation of positive free cash flows from projects for repatriation is available only after first few years of development,” Pankaj Bansal, Director, M3M India Group, tells The Dollar Business. On similar lines, Shobhit Agarwal, MD (Capital Markets) & International Director, JLL India, says, “Fund raising and investment activities have picked up. However, we have to be patient before we see sizable investment coming in.”

Last hopes

The new FDI policy was unveiled in February, 2015. So, it’s, probably, too early to say if it can provide the break the Indian real sector was waiting since a very long time. While a reasonable some of money has flowed in since it was released, it hasn’t made any significant change to the fortunes of the sector. Moreover, FDI is not just about money. It’s about global best-practices. It’s about new technologies and it’s also about more choices for the end-user. So, what’ll be interesting to note over the next few months is if the new FDI norms do help bringing in any of these or not. Else, given that Indian needs two crore new house, given the fact that current prices are beyond the rich of most even in the middle-class and given the fact that ‘housing for all’ has been one of the biggest war-cries of the Modi government, policymakers will have their work cut out. For, then, the Reserve Bank of India putting the real estate sector in its ‘sensitive’ list will get further validation and the sector will become a bigger untouchable, not only for foreign, but also for domestic investors.

“We have to be patient before we see sizeable investment come in" - Shobhit Agarwal, Managing Director, Capital Markets & International Director, JLL India

Shobhit Agarwal, Managing Director, Capital Markets & International Director, JLL India

 

“The new FDI policy has generated global interest in Indian real estate” - Pankaj Bansal, Director, M3M India Group

] Pankaj Bansal, Director, M3M India Group