COMMENT. Opening the floor for development

The Union Cabinet approved amending the existing foreign direct investment (FDI) policy for the construction development sector, in line with the Budget announcement, brought cheers to the real estate industry. These players have a long standing request for relaxed FDI rules to attract funding. Shares of realty companies, particularly those with high debt, such as Unitech, DLF and Puravankara climbed after the announcement.

The new rules are investor friendly on multiple fronts. For one, the norms on the minimum development area for a project have been relaxed. For serviced plots - where roads, water, drainage and other conveniences are available – the minimum land size has been waived, from a requirement of 10 hectares earlier. For construction-development projects, the minimum floor area is reduced to 20,000 sq. meters, from 50,000 sq. meters.

These changes will help stoke foreign investor interest in smaller projects and those in tier-2 and tier-3 cities. “The revised policy will first help investment infusion into housing development projects in suburbs and periphery of metropolitan locations as well as for niche housing projects in city centre locations of Delhi, Mumbai and Bengaluru” says Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield, a real estate consultant. Shares of Mumbai based realtor HDIL shot up 6 per cent.

To boost funding to affordable housing projects, the conditions of minimum floor area as well as capital requirements are waived if at least 30 per cent of the total project cost is committed for low-cost affordable housing. To qualify as an affordable housing project, at least 60 percent of the floor area must be used to build small homes (not more than 650 sq feet). The Government noted that enhancement of the affordable housing stock “is an urgent need” in order to stem the proliferation of slums in and around the cities. Shares of Mahindra Lifespace Developer, which has launched multiple affordable housing projects, were up 3 per cent.

The terms are further sweetened by a reduction in the minimum investment requirements. Investee companies are required to bring in an investment of $5 million, down from $10 million earlier. The move is aimed to bring in more investments into the sector that has seen a decline in fund flow after 2009-10.

The lock-in period for investment has however not been relaxed from 3-years. Foreign investors can however exit earlier if the project is completed. The Government may also permit repatriation of FDI or transfer of stake before project completion on a case to case basis by Foreign Investment Promotion Board.

As a whole, these changes could bring relief debt-laden developers who have been hit by slowing demand, approval delays and rising interest cost. That said, while investors are likely to benefit from the new norms and funding may receive a boost, realty companies may still have to brace for a slow recovery. “FDI will not begin flowing within the next 24 hours. We foresee another 8-12 months for the decision to bear fruit”, says Shishir Baijal, Chairman & Managing Director, Knight Frank India, a real estate consultancy firm. ​

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