The easing of FDI (Foreign Direct Investment) norms for the Indian construction industry is going to help the real estate sector, which has been gasping for funds after the banking system turned off the ‘easy loan’ tap for many realtors - a ‘facility’ that they had begun to take for granted. Rather than RBI having to step in to save an industry from a severe downturn (as central banks in other countries have done), the government has decided to instead ease the rules and regulations pertaining to FDI in the real estate sector. This will make it easier for foreign investors to enter the market, transact and make profitable exits. As per the new rules, the government has reduced the ticket size of FDI-eligible projects from 50,000 square meters to 20,000; the minimum capital requirement has also been reduced from 10 million dollars to 5 million dollars. Further, an investor will be able to make an exit three years from the date of final investment. The government is looking to revitalise the real estate and construction sector, which has become a drag on the economy. While the real estate industry has welcomed the move, there is some apprehension on whether this would help create another ‘bubble’ – especially with the allowance of a shorter term investment, in this long gestation period industry.
Real estate analysts are hopeful that FDI in real estate will not only encourage the builders in invest in new areas, but also help in the completion of a large number of housing projects that have been delayed due to lack of funds. These builders should now be able to more easily rope in private equity funds, NRI investors and financial institutions. Sanjay Sharma of Qubrex says that the easing of FDI norms might help the industry in the short term, but unless the fundamentals change and builders are ready to work in a transparent and accountable manner, any uptake will not be sustainable. His worry is that the easing of financial options for builders may just give many of them another shot at speculation on new land banks and projects, whilst their current projects continue to languish. It is precisely for this reason that Indian banks have turned off the taps – and not because they face any shortage of funds. In fact the major downturn in the Indian real estate occurred because private equity funds started taking back the money they had invested in this sector. The sceptics further argue that more foreign money in the real estate sector is not going to ease the pain of the average house buyer, as it may lead to a ‘speculative’ rise in prices (despite no pick up in demand in sight). The affordability of housing in markets like Delhi and NCR has never been so difficult, and a MagicBricks IIM Survey has revealed that housing sentiment has gone negative in this quarter in the Millennium City. The worst affected in terms of housing sentiment on the MagicBricks index is Sohna Road, which had become one of the hotspots of real estate development in the last 2 years, based on the fast progress of the Southern Peripheral Road (SPR), also known as Golf Course Extension Road, project – which is now languishing. Vallum Capital Advisors, a Mumbai-based firm, is also of the opinion that builders could use the FDI funds to create new land banks or divert the funds to other
projects. The belief seems to be that rather than putting more good money into a bad system, it is better to first rectify the system itself. Unless there are reforms in the real estate industry, and government improves the functioning of the regulatory bodies, there is little hope that builders will be motivated to become more transparent. Another fallout, from this reduction in the minimum requirement of built areas and capital for FDI, is that projects in already developed areas like MG Road, Golf Course Road and the developed colonies of the City, would become more in demand. They would be felt to be ‘safer’ areas to invest in. In the process, it is likely that large projects on the outskirts of the City, like on SPR and NPR/Dwarka Expressway might fight it tough to attract FDI, as they have longer gestation periods. And it is precisely these projects that need ‘help’ today. Further, it is doubtful whether FDI would find its way into affordable housing projects; the builders in Gurgaon have anyway been more interested in serving the high-end premium segment of luxury apartments. There should anyway be no expectation of any drop in prices, as foreign capital is expensive, and is bound to seek higher returns. Amit Sharma, a realtor, opines that the new FDI norms will help real estate development in towns like Manesar, Sohna, Bhiwadi and Rewari, as NRIs can now invest in smaller projects - which are developed in small plots of 4 to 5 acres. He adds that the relaxed norms will make FDI almost like FII, which means that these funds will move in and out based on expectations of profit, without giving much thought to the longer term viability of projects or the industry. The primary issue is that instead of first correcting the fundamental problems in the real estate sector, the government is trying to pump-prime it. There are good chances that NRIs will start trading in properties. Pankaj Kumar, a real estate broker in Gurgaon, points out that prices in Gurgaon have not declined much because there is still huge ‘holding capacity’ – that too in cash. A Gurgaon-based ‘land aggregator’ for major developers says that builders need lots of cash for buying land and licences. It is because of this reason that the majority of buyers and investors in Gurgaon today are those involved in trading and business, as they have a steady flow of unaccounted cash. However, after the heady run till a few years ago, a large majority of real estate investors in this city are stuck with their investments, as builders have failed to deliver – either on their projects or on assured returns. Mahesh Sharma, a real estate consultant, says that it is important that first time house buyers are brought back into the market - by offering them more affordable flats and incentives. Similarly, realtors should be offered a ‘single window’ clearance and easier land buying and licensing norms.
However, there are some who see some really positive outcomes from the revised FDI policy. They believe that foreign capital is likely to come at a competitive cost (with not many growth options available globally), and also motivate foreign developers to enter this market. Even small developers and builders would be helped, as the relaxation in norms could give a fillip to the small office, residential and shopping centre projects in Tier-II and Tier-III cities. FDI projects will also be exempt from the normal 30% commitment for affordable housing. With equity investments in this sector at a 50% level to those in 2008, FDI should be a good option. Real Estate Investment trusts (REITs) are also due to make an impact soon. Further, amendments to the Land Acquisition Act and the passing of the Real Estate Regulatory Bill should help this sector stabilise well. In Gurgaon, with the change of govt. in the State, we may finally see a ‘resident raj’, rather than the all-pervading ‘builder raj’.
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