What Does 100% FDI in Real Estate Mean for Smaller Real Estate Developers

What Does 100% FDI in Real Estate Mean for Smaller Real Estate Developers
What Does 100% FDI in Real Estate Mean for Smaller Real Estate Developers

FDI (Foreign Direct Investment) for the real estate sector opened up in 2005. Back then the real estate sector and especially smaller players were reeling under the pressure of unsold inventory, delays in projects, and negative cash flows, foreign investors too were shying away due to the uncertainty in profits and the mandatory tenure of locking for investments.

In 2005, the government and RBI decided to change up things and issued a directive to allow 100% FDI for the housing, townships, built-up infrastructure and construction-development, albeit with specific terms and conditions including a certain minimum capitalization, minimum area and lock-in period for repatriation.

This reform, in turn, helped open up newer ways of funding and led to the maturing of the real estate industry in terms of product offerings and business practices. FDI inflows to the realty sector increased by over 150% (year-on-year) on an average, between 2005 to FY2009-10). A total of approx $25 BN flowed into the Indian real estate sector.

That being said, the government further approved changes to relax the terms above and conditions after considering the slump in the real estate industry between 2009 and 2014.

In 2018, the Indian Government decided to allow 100% FDI under the automatic route (not requiring any government approval) in construction development segment (that includes housing, townships and built-up infrastructure) and single brand retail trading. Also, the Union Cabinet also clarified that real estate projects within the Special Economic Zone (SEZ) are eligible for 100% FDI.

Policy Changes Are Driving Fund Flow

Post relaxation in FDI norms, the real estate sector has started seeing renewed growth in terms of investment and developmental activities.

As per a report published by KPMG and Naredco, the real estate sector is expected to grow up to $650 billion by 2025 and exceed $850 billion by 2028. This change would be driven by emerging asset classes such as co-working spaces and affordable housing along with a steady demand generated due to rapid urbanization, regulatory reforms, and rising household income.

Some of the notable aspects of investments made under 100% FDI in the retail sector, as per the report, are:

  • In 2018, average deal size tripled to $157 million from $47 million in 2016
  • Overall, 44 percent of the investments made in 2018 came from foreign investors primarily based out in the U.S., Canada, and Singapore
  • Over 90 percent of the foreign investment has been towards commercial projects across Mumbai, Bengaluru, Pune, and Hyderabad
  • Average deal size of foreign investors is $149 million compared with $87 million of the domestic investors
  • Domestic investors have almost equally preferred commercial ($959 million) and residential ($870 million) projects.
  • Mumbai has been the preferred real estate investment destination for foreign investors, with attracting almost 53 percent (or $2 billion) of the total investments.
  • Hyderabad ($793 million) and Bengaluru ($694 million) have been the preferred destinations for domestic investors

Increasing Investor’s Interest Towards Commercial Real Estate

With the introduction of 100% FDI, there has been an increasing focus of investors towards commercial real estate, which would help them build a portfolio of rent-yielding assets.

Investor inflows in 2014-17 in commercial projects have increased by more than 150 percent, which is more than the combined inflows from the previous seven years. Key drivers behind this decision include steadiness in the commercial office sector, strong impetus in leasing, stable returns on investments, and the potential to include income-yielding assets under REITs.

Also, foreign players are showing more and more interest in office space due to scarcity in supply of sustainable office spaces, recovery of global growth and improvement in the country’s real estate sector courtesy various reforms.

Affordable Housing Projects Gaining Preference

Along with the commercial real estate segment, residential market too has been reviving, thanks to the clarity of the implications of GST and RERA, along with 100% FDI.

That being said, the government’s push towards providing affordable housing is helping the realty industry gain traction and attract both small real estate developers and investors. Affordable housing segment presents an opportunity for both foreign and domestic investors, due to the enormous unmet demand for homes, RERA and the government’s “Housing for All by 2022” and Pradhan Mantri Awas Yojana (PMAY) schemes.

Moreover, the government’s decision of extending benefits of the PMAY and granting the infrastructure status to affordable housing has given further impetus to the sector. For small private real estate developers, the Public-Private Partnership (PPP) initiative of the government, which allows central subsidy and interest subsidy, each up to INR 0.3 million on per house built comes as a welcome benefit.

Impact of 100% FDI in the Real Estate Sector

According to industry experts, the regulatory reforms such as RERA, GST and Benami Transactions Bill have helped create a path for a consolidated, transparent, and investor-friendly real estate sector. Further introduction of 100% FDI norms would affect the Indian real estate segment in the following ways:

  • Standardization of the quality of projects
  • Likely increase in competition among local developers in terms of price, quality, and timing to market
  • Geographical expansion of foreign institutional investors and private equity players
  • Simplification of government and RBI procedures relating to investments into the real estate sector

Joining the Future Dots

Traditionally, real estate in India was one area in which only the NRI’s were interested. With the introduction of 100% FDI in 2005; however, we saw a huge influx of capital with both Institutional and Corporate Investors investing their funds into the country’s real estate segment.

As of 2019, the sector is experiencing increased transparency and accessibility, and FDI inflows continue to grow in the segment.

Alongside, both large private players and small developers have revamped their management and accounting systems to meet due diligence standards and attract funding. Moreover, technology is going to be a key factor in consolidating partnerships between small-scale local players & foreign brands and improve the image of real estate in India.

Thus, software technologies such as a specialized Real estate ERP, workflow automation software, etc can help private developers to improve the ease of doing business with higher FDI inflows. Not only this, leveraging real estate ERP and other associated technologies can help small-scale local players gain a firm footing against more prominent industry players.

References :

  • https://www.skpgroup.com/data/resource/skpfdiinrealestateinindia_.pdf
  • https://www.ibef.org/economy/foreign-direct-investment.aspx
  • https://www.cbre.co.in/en/research-reports/India-Real-Estate-Market-Outlook-2019
  • https://credai.org/assets/upload/report_updates/traversing-through-the-epic-predicting-the-curve.pdf

Top 3 Tips Straight from the Industry Experts

In the past few years, real estate as an asset class is transforming quickly. Major real estate players are building and investing in the sector on an epic scale. Moreover, the landscape is becoming more sophisticated and widespread, with a varied range of risks, returns and innovations being the new drivers of value.
For instance, the demand for private capital for real estate investment has increased manifolds during the past decade. In the emerging economies, the sector is witnessing a great migration to the cities, where the growing population and middle class are the drivers behind a desperate need for more urban real estate.
On the other hand, the cities are growing too, although not so rapidly. Here, the new value drivers are demographics, environmental issues, and real estate innovation. To give you a glimpse of what future possibilities lie ahead for the real estate sector, here are a few insights from some of the industry’s best minds. Take a look.

“The new regulatory framework will bring more order to the sector” – HN Vijaya Raghava Reddy, National President, Builders Association of India (BAI)

The new regulatory framework will bring more order to the sector
The new regulatory framework will bring more order to the sector

The regulatory framework implemented under RERA is expected to bring more order to the industry. Subsequently, real estate developers who depended on market capitalization and the consumers will have to change their ways.
For example, being a small or big player will no longer matter. What would matter; however, is how streamlined and transparent their business workflow and operations are. Therefore, it is only the players who are organized and have proper project development & estimation plans, real-time monitoring tools, project financial management, material procurement systems and adhere to compliance, who can thrive now.
Going forward, real estate companies will have to reduce their dependency on market liquidity and cash-based transactions. Instead, these companies will have to streamline their process workflow, especially in terms of cost planning and estimation, invoicing and billing, procurement and sourcing, tendering and material management. They will have to provide complete transparency to their customers on project execution and cash flows.

Transparency, Clear Accountability, and Effective Auditing can help avoid construction project cost overruns – one of the Big 5

Transparency, Clear Accountability, and Effective Auditing can help avoid construction project cost overruns
Transparency, Clear Accountability, and Effective Auditing can help avoid construction project cost overruns

In India, real estate companies are running behind schedule in terms of construction project delivery due to the following factors:

  • Inadequate planning and inaccurate estimations
  • Ambiguous contract terms and lack of cost control incentives
  • Ineffective project oversight, governance, and management
  • Availability of skilled labor
  • Non-transparency in the procurement process
  • Delayed payment and Imposed cash constraints
  • Inexperienced management team
  • Insufficient communications and sluggish decision making
  • Absence of real-time monitoring tools

Due to the factors mentioned above, real estate construction projects often veer far off track. However, they can be corrected if both the real estate companies, contractors and other stakeholders work collaboratively by implementing successful workflow automation platform.
As part of an efficient plan of action, real estate companies need to invest in a comprehensive ERP software for real estate & construction, for monitoring and managing the project from inception to closeout.
These technology-driven business solutions can help mitigate schedule delays and cost overruns while improving critical governance and control processes including:

  • Standardization of processes
  • Transparency of controls
  • Accountability of responsibilities
  • Information audit trail

An effective risk management process is also essential to ensure timely project delivery. It enables real estate companies to monitor risks and identify when they need to implement a mitigation plan in place.

“ The real estate industry will undergo a consolidation phase on account of RERA and other factors.” –  Ashish Puravankara, MD Puravankara

The real estate industry will undergo a consolidation phase on account of RERA and other factors.
The real estate industry will undergo a consolidation phase on account of RERA and other factors.

2018 had been the year of revival for the real estate sector in India. Not only was there was an improvement in the housing sales, the but the major realty players too, got serious on the completion of projects, after the implementation of the subsidies under RERA and PMAY.

Moreover, transparency and accountability in the real estate sector improved to a great extent with the implementation of the Real Estate Regulatory Act (RERA).

In 2018 and now 2019, there have been some remarkable trends in the real estate sector including Affordable Housing as well as mid- segment and luxurious home spaces. By capitalizing on Affordable Housing and Credit Linked Subsidy Scheme (CLSS), real estate companies are now able to access loans at more affordable rates.

That said, the companies also need to be compliant and adhere to the project completion deadlines set by the RERA. To do this, realty majors are leveraging technology to develop process capabilities such as effective budgeting and estimation, automated tendering and procurement, real-time project monitoring tools, etc.

Real Estate market in India Needs Workflow Automation

According to a market study conducted by McKinsey, real estate projects may take up to 20% more time to finish than their scheduled completion and experience budget increments by up to 80 %.

Therefore, the real estate and construction sector not only has to adopt process and technology innovations but also take steps to fix the basics. Project planning, for instance, remains mainly uncoordinated because real estate companies prefer working on paper.

Similarly, contracts often fail to include incentives for risk sharing and innovation while procurements are still unsophisticated. Therefore, the real estate industry needs to embrace new digital technologies such as ERP software for real estate and construction to achieve long-term benefits. Without workflow automation or process management tools, real estate companies would face a hard time meeting the increasing consumer demands, adhering to stricter compliance requirements and remaining profitable.

References :

  •  https://www.mckinsey.com/~/media/McKinsey/Industries/Capital%20Projects%20and%20Infrastructure/Our%20Insights/Imagining%20constructions%20digital%20future/Imagining-constructions-digital-future.ashx
  • https://www.pwc.com/sg/en/real-estate/assets/pwc-real-estate-2020-building-the-future.pdf
  • https://www.thehindubusinessline.com/news/real-estate/outlook-for-construction-sector-is-very-positive/article10046647.ece
  • https://content.magicbricks.com/property-news/industry-buzz/what-experts-say-about-real-estate-industry-in-2019/103776.html