India’s Urban Housing to Ignite with FDI
India’s relaxed rules for foreign direct investment (FDI) in construction will make it easier for foreigners to invest in real estate. While the promise of capital for those steeped in debt has surely been cheered by the real estate sector, it could bring more pain for buyers back at home.
Demand and supply dictate logic- More the foreign money in realty, higher the property prices. Current urban realty prices assure affordability to a handful few. The average home buyer would, however, have to exchange 20-30 years of future earnings to be able to afford a house.
By bygone rules, the government allowed 100% FDI in real estate development but with strict riders, including a lock-in period of three years during which the investment cannot be reclaimed. Under the new rules, the minimum built area for projects in which foreign investment is allowed will be reduced to 20,000 square metres from 50,000. For “serviced plots”, a minimum land requirement has not been established.
A rough calculation by Vallum Capital Advisors shows that an FDI-compliant project sale of $150 million requires a peak investment (except land and approval) of not more than $20 million. This implies no need for private equity (PE) investments. It is possible to fuel prices by creating a stock of inventory, diverting money to other projects and investing to build land banks for future projects.
The reduction of minimum requirements for built areas and capital will now allow investment to flow into South Mumbai or central Delhi as opposed to it going to the outskirts for favorable construction spaces. The new rules will encourage the development of smaller projects, in areas with limited land availability.
Prolific construction in prime areas does not imply a decline in property prices. Demand for houses in posh areas far exceeds supply. Builders will rather cater to snob requirements than construct ‘affordable flats’ in south Bombay or south Delhi.
Pankaj Kapoor, MD of real estate research firm Liases Foras seems to think it is unwise to allow easier FDI for home buyers as it is expensive capital which calls for high return.
Once the government allows more hot money to come in, investor expectations from returns on investment rise without any consideration for affordability. If builders have to ensure that investors get bang for the buck, they have no choice but to prop up realty prices.
While an investor will be allowed to exit on completion of the project (or after three years, from the date of final investment, whichever is earlier), the government may also permit repatriation of FDI by one non-resident investor to another before project is completed.
Source: Indian Realty News
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