The Hindu Business Line : FDI in realty can usher innovative technology, funding options

As per the Tenth Five year Plan estimates and with the continuance of the `two million housing programme,' the housing sector's investment requirement would be $155 billion.

Chennai , April 6

ONE of the immediate developments following the deregulation of foreign direct investment (FDI) in Indian property markets is that international real estate investors will be able to bring in innovative technology, designs, formats and funding options from developed countries, which would be one step above local market practices, said Mr Ramesh Nair, Associate Director - Corporate Solutions, Jones Lang LaSalle, a firm of international property consultants.

Mr Nair said that this could include specialised asset management practices, operating formats and creative financing methods such as securitisation and long term financing. He said that in most developing countries, local investors are unable to meet the needs of multinational firms. This gives opportunities for international investors because of the inability of local capital to meet the needs of foreign firms. Local developers also get the opportunity to partner with international developers. The partnership will help bridge the funding, innovation and quality issues, he said. One of the fears expressed by local industry has been that the entry of foreign real estate developers would be the end of small construction enterprises. Mr N. Ananthanarayanan, Chennai Head, Chesterton Meghraj, a firm of international property consultants, said that such fears are not only premature, but also unfounded.

Overseas developers will have to involve local companies as their partners, as real estate is a highly specialised sector requiring local knowledge and expertise, particularly on land acquisition and approvals from statutory authorities. Immediate effects would be joint ventures between overseas developers and local developers, which will enhance good quality construction at lower costs, he said.

Mr Nair said that the high level of interest among cross-border investors, coupled with the liberalisation measures, would lead to significant inflows of international equity into Indian property markets at both enterprise and asset levels.

Although the Government has not undertaken capital market deregulation such as allowing real estate investment trusts (whether domestic or foreign owned) to operate in India, the measures taken in 2004 to allow international and domestic companies to operate real estate funds and pooled vehicles through the private equity fund route is a step in the right direction, Mr Nair said.

He pointed out that the Tenth Five Year Plan estimated the urban housing shortage at 8.89 million dwelling units in 2002. Further, the total number of houses that would be required cumulatively during the Tenth Plan period is estimated at 22.44 million dwelling units. As per the Tenth Five year Plan estimates and with the continuance of the `two million housing programme,' the housing sector's investment requirement would be $155 billion, with $66 billion coming from the public sector.

The gap can only be bridged if FDI is allowed, he said.

The entry of FDI into the real estate sector will not push the prices up, as increased competition only drives down prices and also improves quality, benefiting the ultimate end-user.

With the new policy, 100 per cent FDI in construction through the automatic route has been facilitated. The minimum area to be developed under each project has been reduced from 100 acres to 25 acres and 2,000 dwelling units for serviced housing plots or a minimum built-up area of 50,000 square metres. There is now a minimum $10-million cut-off for a wholly-owned company and a minimum $5-million stipulation for joint ventures.

The new policy states that the original investment cannot be repatriated before three years. The policy adds that FDI projects would be accorded national treatment on par with local developers and that the sale of undeveloped land is barred to prevent speculation in real estate.

Ms Manju B. Pundir, Architect Planner, Chesterton Meghraj, said it is, however, not entirely appropriate to say that FDI in real estate has not been allowed until now. The problem lay in its earlier avatar, which had not enabled a sufficient inflow of foreign investment.

Stipulations that an investor needed to build an integrated township only and also develop 100 acres of land were stifling and discouraged prospective investors from foraying into India, she said.

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