With the Reserve Bank of India (RBI) frowning on structured products and the government stipulating a three-year lock-in period, foreign direct investment (FDI) in real estate has slowed down significantly over the past year. Industry-watchers point out that after the Lehman crisis, investors have turned more cautious and capital flows into Indian real estate have tapered off.

While FDI flows amounted to roughly $14-15 billion in the four years to December 2009, just about a billion had come in till November last year. Regulations apart, poor project execution leading to losses for some investors has made them far more circumspect, especially in a hostile macroeconomic environment.

Says Punit Shah, executive director, KPMG: ?With the central bank inquiring into the use of structured products that funds use to invest in real estate, investors have become cautious. RBI has been closely watching the use of structured products such as cumulative compulsorily convertible debentures (CCCD).? The other reason for the slowdown in real estate FDI, he says, is the three-year lock-in for every tranche of investment.

In the past, investors have run into problems with promoters who reneged on payments, making offshore real estate funds cautious. Macro-economic headwinds too could delay projects and keep money away, believes V Hari Krishna, director (investments), Kotak Realty Fund.

?Rising inflation is a worry and as and when it starts impacting growth, global LPs (limited partners) may allocate capital away from emerging markets including India,? he observes.

Berinder Sahni, associate director, Colliers International points out that funds have taken advantage of the recession to pick up distressed assets in developed markets like the US.?

Foreign capital flows into realty could decline up to 30% this year from the 2007-08 figure of $3 billion. ?Most of the money being invested in 2009-10 was raised back in 2007-08, whilst funds invested in 2011-12 must be raised after the Lehman crisis,? Krishna explains. However, the faltering recovery in the US, Europe and Japan may prompt investors to perceive India as a less risky market than at present. ?With markets in US and Europe still not as strong, India provides an opportunity for growth,? says Ravi Ahuja, executive director, Cushman & Wakefield. Meanwhile, local investors seem a tad more bullish with the domestic real estate pool growing fairly quickly with inflows of roughly $5 billion in the last five years. HDFC, Kotak, Indiareit, ASK, Milestone, Motilal Oswal and Aditya Birla have been keen on real estate, R2,000-R2,500 crore investments planned for this year.