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It is common knowledge that the real estate sector is struggling to keep its head above the water, given the large inventory of unsold space in both, large and small cities. This is a paradoxical situation, given India's high population density and the high potential demand for housing in the country.
Note, the key phrase here is potential -- and not real -- demand. Builders have not been able to convert the the need for housing into sales for a variety of reasons, the chief among them being affordability. And it is in this context that the amendment to the existing foreign direct investment (FDI) policy comes as a shot in the arm for the construction development sector.
A key proposal of the new policy is the paring down of the minimum project construction size eligible for FDI from 50,000 sq m to 20,000 sq m. The effect of this will be to give a large number of mid-sized and professional developers better access to capital and provide impetus to affordable housing and overall development which could bring relief to home seekers who were hitherto dealing with out-of-reach prices even in the affordable segment.
Availability of funds will help developers execute projects in time through an extra route of funding and cheaper housing becoming available. going ahead. The easier rules will help faster completion of projects that would otherwise have been starved of funds due to elevated debt levels, and would therefore have been delayed.
Reduction in the built-up area will also benefit the foreign investor, as the new rule has opened up smaller properties to FDI. Apart from allowing him to spread his risk more evenly, it also facilitates a faster exit simply because smaller projects also get completed faster as well.
The new rule also permits the flow of capital to the metropolitan cities instead of limiting it to the mofussil areas. The earlier minimum construction threshold made it difficult to identify areas for development in cities where land is a scarce commodity.
The union government has also halved the minimum capital requirements to $5 million for 100% FDI in realty, and has mandated the expiry of the lock-in the moment a project is completed or within 3 years of the final investment subject to development of trunk infrastructure, whichever is earlier. Trunk infrastructure refers to essential amenities such as roads, water supply, street lighting, drainage and sewerage. FDI can be repatriated prior to fulfilment of any of these conditions if approved by the Foreign Investment Promotion Board (FIPB).
This move is likely to give builders access to cheaper finance and reduce debt load, besides offering an exit route from stalled projects. The foreign investor, on the other hand, gets access to a great number of projects that were earlier outside his scope. This has been made possible with an exemption to the new rules on minimum capital and minimum construction for those projects that commit 30% of the total cost for low-cost affordable housing involving the construction of dwellings with an area of less than 60 meters. The exemption is likely to fast-track housing for the less affluent sections of society, a section that has been languishing at the bottom of the industry's priority list.
The permission to sell completed projects to foreign investors will help real estate developers get much-needed liquidity into the system to trim their debt.
The real estate industry is the largest employer in the country and a top destination for foreign investors. Off late, however, FDI inflows to the sector have been declining and was at $1.2 billion in FY14, down eight per cent from the previous financial year. Apart from providing some much-needed fillip to a sagging industry, the new FDI policy will help fulfilling the shortage of 25 million houses in the country, more than 95 per cent of which is in the economically weaker and low-income segment and built up infrastructure for different purposes. The policy will transform the system by introducing global best practices and makes the processes more efficient, transparent and time-bound, which is the need of the hour in the real estate sector and also serve to aid the setting up of the 100 smart cities being planned the central government.
-- The author is a partner of J Sagar & Associates, Advocates & Solicitors. Views are personal. (ashoogupta@jsalaw.com)
