Foreign Direct Investments (FDI) in the Indian Real estate

India’s claim to be one of the fastest growing economies in the world is best proved by the increasing number of countries showing interest to invest in the country as India is considered a stable country for investments by the overseas corporate market. This encouraging trend is further accelerated by the government’s decision to liberalize policies on the foreign direct investments (FDI) in India in the real estate sector.

The Indian government in March 2005 amended existing norms to allow 100 per cent Foreign Direct Investments (FDI) in the construction business. This liberalization act cleared the path for foreign investment to meet the demand into development of the commercial and residential sectors and has encouraged several large financial firms and private equity funds to launch exclusive funds targeting the real estate sector. Until now, only Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were permitted to invest in the housing and the real estate sectors. Foreign investors other than NRIs were allowed to invest only in development of integrated townships and settlements either through a wholly owned subsidiary or through a joint venture company in India along with a local partner.

At the same time, the government has also set up certain guidelines for investors willing to apply in FDI, which have conditions like area, investment options and target for completion of a project.

Minimum area

1 In case of development of serviced housing plots, 10 hectares (25 acres)

2 In case of construction-development projects, built-up area of 50,000 sq m.

3 In case of a combination project, any of the above two conditions Investment

Minimum capitalization

i. for wholly owned subsidiaries - US$ 10 million

ii. for JV with Indian partners - US$ 5 million-, to be brought in within 6 months of commencement of business

Original investment cannot be repatriated before a period of three years from completion of capitalization.

The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB).
Time frame & rules

At least 50 per cent of the project to be developed within five years from the date of obtaining all statutory clearances.
Investor cannot sell undeveloped plots - where roads, water supply, street lighting, drainage, sewerage and other conveniences are not available.
With this change in the government policy on FDI, all real estate sectors, residential, commercial and retail are currently witnessing huge growth in demand. India, during the first half of 2005-06 fiscal has attracted more than three times foreign investment at US$ 7.96 billion during making it amongst the “dominant host countries” for FDI in Asia and the Pacific (APAC). One of the most anticipated promises for the Indian real estate sector, which in turn will benefit developments of hotels, has been the entry of Real Estate Mutual Funds (REMFs) or Real Estate Investment Trusts (REITs).

The government policies on FDI offer opportunities for foreign investors to invest in different sectors like 100 percent in power trading, processing, development of new airports, laying of natural gas pipelines, petroleum infrastructure and warehousing of coffee and rubber. Limit for telecoms services firms have been raised from 49 per cent to 74 per cent. Another cap to the retailing industry in India is allowing 51% FDI in single brand outlet. The government is now set to initiate a second wave of reforms in the segment by liberalizing investment norms further. And this has also brought about a conspicuous interest by towards investments in the Indian hospitality sector. Industry reports suggest the inflow of about US$ 500 million into the real estate sector over the past six months and is expected to rise to a massive $ seven to eight billion over the next 18-30 months.

India in the next five-year period is estimated to require investments worth US $ 25 billion with the urban housing sector. This again has opened up opportunities for foreign investments in the realty sector. Despite the fact that in 2002, the Central government allowed up to 100% FDI for setting up townships, the flow of FDI investments has been stymied by the 100 acre criterion since acquiring such a large chunk of land was impossible in metropolitan cities and even satellite cities and state capitals,. But a landmark decision taken by the Union government in 2005, where the minimum land area for development by foreign investors was lowered from the earlier floor of 100 acres to 25 acres has thrown open the lucrative parts of the Indian realty market to global investors. Another perceptible spin-off of the easing of FDI policies will be the impact on quality and inevitable acceleration in construction activities.

Foreign Direct Investments in the real estate sector in India would contribute towards making the sector more organized. Besides increasing professionalism in the sector, it would bring in advanced technology and help in the creation of healthy and competitive market environment for both domestic and foreign investors.