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
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