Government refines the laws on Foreign Direct Investment for the real estate industry.

By Abhay Shah, Realty Quarter

Overseas investment regulations in construction were eased by the government to bring money to the fund-starved industry and serve its twin goals of creating faster jobs and homes for all. A comprehensive proposition by the Department of Industrial Policy & Promotion (DIPP) was endorsed by the Union Cabinet on Wednesday, removing the minimum 10-hectare rule for serviced residential plots and slashing the minimum floor space for construction development projects from 50,000 sq. m to 20,000 sq. m to qualify for foreign investment.

It also halved the minimum foreign direct investment (FDI) from $10 million to $5 million and significantly relaxed the exit standards, elevating an overall enthusiasm from the industry now hoping for larger overseas fund flows into a sector that urgently requires money. Government relaxes FDI norms for construction, real estate sector “Government is bang on (target) we are very happy about the completion part of the trunk infrastructure as it will bring in asset-based FDI. This will ensure that project developer who took FDI will not be left with more debt,” said Rajeev Talwar, DLF’s executive director, India’s largest listed contractor. Trunk infrastructure relates to vital facilities such as roads, water supply, road lighting, drainage, and sewerage.

The new laws will also boost the government’s planned 100 smart cities. Homebuyers will also cheer the relaxation as fresh inflows make it possible for projects to be completed that are stuck and cheaper housing to become available in the future. Due to the slowdown and the lack of funding caused by high debt levels, most housing projects are running one to two years or even more behind schedule.

“It’s a great step by the government and will certainly assist developers who are running late with their projects because of the funding crunch. Townships take at least 10 years to complete, so relaxation will ensure that funds are not an issue,” said RR Singh, Director-General of the National Real Estate Development Council, or Naredco. The norms will come into force after a notice is issued by DIPP. The government has pledged housing for all by 2022 and offered an impetus in the revamped strategy for affordable housing to that end.

Minimum area and the capital sectorial situation will not apply if the developer lays aside 30% of the affordable housing project, identified as dwelling units of less than 60 sq. m. Singh said it was hard to find 10 hectares of land in Tier-I and Tier-II cities, so scrapping this rule would encourage investors to bring in money. The new government had said in its July budget that it would relax the laws on foreign investment for the industry. The government is also seeking to increase the construction of hotels, tourist attractions, hospitals, special economic zones (SEZs), educational institutions, old-age homes, and investments by non-resident Indians (NRIs), providing free access to these segments.

“These steps are anticipated to result in increased inflows into the construction industry as a consequence of loosening industry circumstances and clarifying terms used in the policy,” the government said in a statement.

In 2013-14, the industry gained $1.2 billion in FDI, down 8% from 2012-13. The most important incentive for foreign investment is the easier exit after completing a minimum capitalization of $10 million relative to the current three-year lock-in rule. Under the new rules, investors will be required to raise $5 million within six months of project commencement and balance over 10 years or before project completion, whichever is earlier.

On completion of the project, the investor may leave, or three years after the final payment, subject to trunk infrastructure development. If authorized by the Foreign Investment Promotion Board, FDI may be repatriated or transmitted prior to completion of the project. “Transitory lock-in and exit problems along with the prohibitive minimum limit for the built-up area have had a dampening effect on FDI in the industry,” said Sachin Sandhir, global managing director, emerging business, and MD, South Asia, RICS.

“A favourable announcement to this end is indeed welcome and will attract more investors to consider investing in India if they are willing to leave the projects earlier.” The construction industry, which has an important ripple impact on the economy, rose by just 1.6% in FY14, adding to the sub-5% growth in the year.

“Investment in the construction development industry has a multiplier effect on the economy through the creation of infrastructure; significant job creation across the full spectrum from unskilled workers to engineers, architects, developers and financial and other support services,” the government said. DLF’s Talwar hopes the steps to bring the industry and the wider economy to a revival.