The Hindu Business Line : Relax FDI, PE norms for small city builders

Most of the big builders getting FDI/PE funds are concentrating on big cities whereas small builders understand the markets better in tier II/III cities. For them to be able to tap these funds, the norms should be eased.

R.Y. Narayanan

With land and construction material prices skyrocketing, bank finance hard to come by and bookings slowing down affecting the cash flow, the real-estate industry in Coimbatore wants the Centre to tweak the FDI and foreign Private Equity (PE) investment norms in real estate in small cities so that these fund sources are able to extend them a lifeline.

The industry also emphasises the need for classifying the real-estate sector as an industry so that it becomes eligible for bank finance at reasonable interest rates.

Mr Rajesh B. Lund, Vice-President, Confederation of Real Estate Developers Associations of India, Tamil Nadu and Managing Director, Srivari Infrastructure Pvt Ltd, Coimbaore, said after the opening up of the real-estate sector in India to FDI and PE investments, the sector has witnessed huge funds flow.

But this has benefited mostly large builders based in metros and big cities and most of the real-estate developers in small cities such as Coimbatore have not been able to access funds from these sources because of the stringent norms.

He said for being eligible to receive FDI or PE funds, the built-up area of a project should have a minimum of 5 lakh sq.ft and the land should be classified as residential. He said that to his knowledge so far, Coimbatore builders have not been able to tap these sources for funding.

He said the size specified for FDI investment is very large for a city of the potential of Coimbatore.

Reclassification bugbear

The other bugbear was the insistence that the land should have been classified as residential to be eligible for FDI/PE funds for land purchase.

Normally it takes about a year to get agricultural/ industrial/ commercial land re-classified as residential land by the government and if FDI/PE funds are not available to purchase non-residential land, then the builders seek funds from other sources at higher cost and even bank funds, if available, cost about 14 per cent.

But bankers are not willing to lend to the real-estate sector since it is not classified as an industry though it is one of the largest employers in the country.

When the market was booming, the reliance on bank finance was less because of regular cash flow. But now because of inflation, cost of funds for the industry and home loan rates have gone up and there is a slowdown and builders have to rely on bank funds. It is imperative for the government to give the real-estate sector industry status.

Mr Rajesh said the advantage of getting funds from these sources is that the builders would be able to take up large-size projects, self-contained townships could be developed, and there would be assured flow of funds. If the market is buoyant, then the developers in Coimbatore also would be keen to take up large-size projects that are FDI compliant.

Growing interest

The PE funds look for an internal rate of return (IRR) of 20-25 per cent post-tax, but in the current market conditions this is difficult. He said representatives of many PE funds had held discussions with Coimbatore builders either directly or through consulting firms and real-estate broking companies also have made a beeline to the city. There is definitely a growing interest among FDIs and PE funds for investing in the city.

He said one result of getting FDI/PE funds will be adherence to international benchmarks which the lenders insist on and the best construction practices they want to follow.

They also monitor the projects strictly. At the moment, because of market conditions, the local builders are not looking at larger projects but once the market situation improves, this would change and FDI/PE funds could flow into the city’s real-estate sector.

Ease eligibility norms

Col(Retd) A. Sridharan, MD, Covai Property Centre(India) Private Ltd, said the Central Government should consider easing the eligibility norms for FDI investment in real-estate in smaller cities/builders and link eligibility to the potential of the city to absorb.

He said most of the big builders utilising FDI/PE funds were concentrating on big cities whereas small builders understood the markets better in tier II/III cities. For them to be able to source PE/FDI funds, the norms should be relaxed.

He said it would be possible for the developers to meet the expected IRR of lenders who also give a moratorium on repayment after project execution, which takes the pressure off the builders.

The Government should also accord industry status to the real-estate sector that would make bank funds available at reasonable rates.

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