Editorial: Constructing a new story

By: |
November 03, 2014 4:00 AM

The fine print in the FDI guidelines is really the key.

Given the project risk associated with real estate in India, right from buying the land to getting various permissions associated with it, it is not surprising not too much FDI has come into the country over the years—only around a tenth of FDI into India over the last ten years has been related to construction. Indeed, most investors have preferred to come in via debt or structured products that offered a return of 15-20%, often assured through a lien on cash flows. This is where the changes to the FDI rules and regulations announced last week will make a difference since there is a lot more clarity now. Indeed, the importance of the new guidelines lies less in the headlines—minimum floor area for development projects brought down to 20,000 square metres from 50,000 square metres—and more in the fine print. So, while lowering the minimum capital requirements from $10 million to $5 million isn’t really going to make much of a difference to an investment decision, the fact that there’s no distinction now between the levels of capital infusion into a wholly-owned subsidiary and a joint-venture will make life easier for investors who were struggling to understand how such entities are defined. To be sure, many of the execution risk—project clearances, environment approvals—remain but there is a bigger play now especially since the rules relating to both minimum capital and minimum area will be waived if 30% of the projects targets low-cost affordable housing. That there is now no floor for construction of serviced plots, so far set at 10 hectares, should also be incentive to invest.

Again, opening up completed malls and commercial establishments to FDI might not seem like a big move since completed SEZs, hotels, educational institutions industrial parks were already eligible for foreign investment. But given there is a fair amount of local money locked up in completed malls and commercial establishment, this will allow foreign investors buy into them; this will, in turn, free up cash and allow developers to repay banks. To be sure, the returns from such ventures may not be more than 7-10%, depending on the asset and the location, but such projects could attract the attention of investors looking for stable returns over a long period of time. Also, these could be fodder for real estate funds scouting for properties to pool into a REIT. Some might find the lock-in period restrictive, but allowing the investor to exit once the project is complete seems fair. In sum, the revised norms can help resuscitate what has become a moribund sector but much will depend on how efficiently the authorities at the state-level work.


Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1New GST rates for Covid items notified
2Trade recovery: Exports surge 69% in May on improved demand
3Fourfold increase in Centre’s grant to TN under Jal Jeevan Mission