Godrej Properties, Brigade, Mahindra Lifespace to gain from FDI in construction

Analysts perceive this development to be a positive for developers with existing joint development / investment arrangements with foreign investors

Realty stocks rallied on Thursday, a day after the government relaxed norms for foreign direct investment (FDI) in the construction sector. The S&P BSE Realty Index was the top sectoral gainer that moved up nearly 3.5 per cent. Unitech, HDIL and DLF were among the top gainers that rallied 8.5 per cent, six per cent and 4.9 per cent, respectively.

Besides reducing the built-up area requirement to 20,000 square metres (sq m) for attracting FDI, investors, in the new norms, will be allowed to exit on completion of the project or after three years from the date of final investment, whichever is earlier. Minimum capital requirement has also been halved to $5 million and the government is now permitting 100 per cent foreign ownership of projects in the construction sector through an automatic route.

Analysts say this move will be a positive for developers with existing joint development/investment arrangements with foreign investors — they will gain as their addressable market will expand. Also, developers with large land banks will benefit with potential increase in demand for land. “At the company-specific level, developers like Godrej Properties, Brigade Enterprises and Mahindra Lifespaces, who have existing joint development/investment arrangements with foreign investors (APG Group, GIC Singapore and Standard Chartered, respectively), will benefit as their addressable market will expand,” says Aashiesh Agarwaal, an analyst tracking the sector with Edelweiss.

“Further, developers with large land banks — Sobha Developers, DLF and Jaypee Infratech — will also gain with potential increase in demand for land. Within our coverage universe, Sobha Developers (buy rating), Godrej Properties (hold rating) and Brigade Enterprises (buy rating) are likely to be key beneficiaries,” he adds.

Oberoi Realty, according to an ICICI Securities report, continues to stand out among publicly-listed Indian realty developers with the strongest balance sheet and a quality asset portfolio, which provides ample room for growth and ability to optimise returns going ahead.

While cashflows have been muted in the past two years, ICICI Securities believes new planned residential launches in the next six months in Mulund, Andheri, Goregaon, Worli and Borivali land parcels provide nearly ‘4x’ FY10-FY14 sales booking potential over the next five years, which will alleviate these concerns.

The move, while lowering the threshold for new investment, will facilitate larger FDI inflows in the construction sector that accounted for about 10 per cent of total FDI inflows in India over the last decade, analysts say. “The reform would now allow foreign investor to invest in smaller projects spread over land parcel of about three – four acres. In the near-term, we expect the policy to support housing and commercial office projects in metro cities such as Delhi and Mumbai, where project size is generally small, yet requires heavy investment due to expensive land parcels and high construction cost,” says Neeraj Bansal, partner and head, real estate and construction sector, KPMG in India.

Though the government has relaxed rules for FDI, analysts do not expect money to start flowing immediately, though they agree this is a step in the right direction and reflects the government’s intention towards reviving the sector. “Relaxing FDI norms will open up the capital markets thereby attracting investments into the sector. However, we foresee another 8-12 months for the decision to bear fruit,” said Shishir Baijal, chairman and managing director, Knight Frank India.