The FDI relaxation by the Government of India is being hailed as a game changer across the Indian real estate sector. The developers even point out that now since the government has relaxed foreign direct investment norms in the construction sector by removing two major conditions related to minimum built up area and capital requirement, it simply means that any project under construction, regardless of size, can have access to FDI. So, it is going to help the cause of affordable housing.
However, the experience suggests that the FDI flow in the past has actually been a catalyst to the skyrocketing of property prices. It has rather defeated the cause of affordable housing in India as easy funding has led to more and offer high-end housing supply in the key Indian cities.
Facts speak for themselves. When the FDI was first allowed into the sector in 2005, the year saw an era of quick appreciation between 2005-08 till the global economic meltdown tamed this unsustainable growth curve. Nearly all the developers who got the big ticket foreign funding had then gone for luxury and super luxury segment of housing.
It is hence questionable today, even though the developers may deny or dismiss the query, as to how the real estate sector that is today hailing the government’s decision to relax FDI norms for construction sector would offer affordable housing this time around.
The government has relaxed foreign direct investment (FDI) norms in construction sector by removing two major conditions related to minimum built up area as well as capital requirement. This means that any project regardless of size which is under construction can have access to FDI. It also eased the rules for foreign investors to exit and repatriate their investments.
Defending the sector, Vineet Relia, Managing Director, SARE Homes says the foreign investment boost would open up gates of investment in the cash-starved sector and accelerate development of stagnant projects. Provision for foreign investors to invest in phase-wise development of projects and the ability to exit and repatriate investments is a strategic change for the sector where most projects get stuck owing to government approvals and funding. This would also bring down the investment window for projects.
“The removal of minimum capital investment of $5 million and floor area restriction of 20,000 sq. mtrs will help in enhancing the return profile for the investors. This development has also provided clarity of FDI in Greenfield projects where a foreign investor can now partner with an existing Indian entity and exit the project after a minimum of 3 year lock-in period. The sector is finally witnessing the expected change and we can expect substantial improvement in delayed projects,” says Relia.
Nikhil Hawelia, Managing Director of Hawelia Group rather questions the way property appreciation and affordability is being calculated in the collective consciousness. According to him, the era post 2005 that saw the first infusion of foreign funds into the realty sector led to a demand driven growth where the end users were major beneficiaries of appreciation.
“Had it been an investor driven growth I would have been skeptical with the foreign money coming into the sector. But the fact of the matter is that the period saw some real boom into the housing market which was all end user driven; they were the ones to make profit. So, to say that FDI money would lead to affordability being compromised would be far fetched imagination,” says Hawelia.
Beyond the apprehensions of affordability going for a toss and the developers expected defence, the fact lies that FDI in LLPs is now permitted under the Automatic Route for the sectors in which 100% FDI is allowed under the automatic route and there are no FDI performance linked conditions. So, the FDI money that is on the cards in the Indian real estate in the next few years would be ROI driven investment; something that can fuel the cycle of quick appreciation.
Since most of the major Indian cities are sitting over supplied inventory, the fresh infusion of foreign funds may bring to the housing market more investors than end users. Analysts therefore have a word of caution: funding alone cannot lead to a sustainable housing market and a comprehensive demand & supply equilibrium with median income of the given city in consideration can only help the cause of the sector. That, unfortunately, is neither the concern of those who are relaxing policies for the FDI nor those who are waiting for the foreign funds to liquidate their dried coffers.