September 14, 2022

The impact of FDI on real estate

The government has made great strides in the tiger-shree of FDI in real estate over the past sixteen years, and the time has come to take this a step further.

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The impact of FDI on real estate
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Currently, 100 per cent FDI is allowed under the automatic route in finished projects for the operation of townships, malls/shopping complexes, and business centres.
Real estate in India is the second largest employment producer, estimated to contribute to 13 per cent of the country’s GDP, and the third largest sector in FDI flow. It is poised to exceed Rs 65,000 crore by 2024 and 2025. The real estate market is constantly evolving with innovative solutions spanning residential, commercial, and retail projects in the main metros and across the country, even in tier 2 cities. According to a report by IBEF, Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun.

However, real estate has also been one of the most closely guarded industries to discourage speculation in the sector. FDI policy still prohibits speculative real estate activity. But, during the past decade and a half, the government has gradually loosened Foreign Direct Investment (FDI) regulations, enabling more investment and economic expansion. Currently, 100 per cent FDI is allowed under the automatic route in finished projects for the operation of townships, malls/shopping complexes, and business centres. However, there is still scope for relaxation in FDI in the sector to calm the real estate market chaos caused by the pandemic.


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A significant concern for the industry was the watering down of the 2016 Real Estate (Regulation & Development) Act (RERA) by the states, which allowed some developers to circumvent the regulations. This forced homebuyers to conduct even more comprehensive due diligence for under-construction projects. The homemaker’s apex body, FPCE, applied to the Supreme Court against this watering down of the rules by the states and stated it is against the consumer’s interest. The Supreme Court agreed and ordered the Centre to investigate if the rules created by various states under the Real Estate (Regulation and Development) Act, 2016 (RERA) are in accordance with the central legislation and serve the interests of homebuyers.

This will ensure uniformity in builder-buyer agreements across the RERA rules of various states. It will also facilitate trust between home buyers and builders by creating accountability and transparency. The government of India has proposed that 100 per cent FDI in completed RERA-registered projects with more than a hundred flats be allowed. The full benefits of RERA would be realised only if the provisions are implemented in letter and spirit.

Under RERA, builders could fully liquidate developed assets and commence construction on new projects with sufficient funds to meet their buyers’ needs. The sale of their current holdings would permit cash recycling, revitalising the market. The government should capitalise on the rising demand from international investors and focus on attracting more foreign direct investment.

Moving towards corporatization

FDI in real estate would be a boon for all parties. The Securities and Exchange Board of India (SEBI) has given its approval for the Real Estate Investment Trust (REIT) platform, which will allow all kinds of investors to invest in the Indian real estate market. It would create an opportunity worth Rs. 1.25 trillion (US$ 19.65 billion) in the coming years. An increase in the FDI cap will attract cheaper finance and more funds from overseas, ensuring projects are completed in time. Furthermore, it will strengthen the Indian rupee and keep inflation in check. The most marked change has been the shift from family-owned businesses to that of professionally managed developers. Real estate developers are hiring experienced experts in fields like project management, architecture, and engineering in order to fulfil the increased need for managing various projects across cities. They are also investing in centralised processes to source materials and organise labour. This in turn means that labour will get the benefit of higher wages and other benefits thanks to MNC firms.

Access to affordable and better-quality housing

Middle- and lower-middle-class citizens will be able to purchase their dream homes. Reductions in the built-up area would help attract foreign capital, resulting in more affordable and better-quality homes. The residential sector is expected to grow significantly, with the Central government aiming to build 20 million affordable houses in urban areas across the country by 2022, under the ambitious Pradhan Mantri Awas Yojana (PMAY) scheme of the Union Ministry of Housing and Urban Affairs. An additional 25 million units of affordable housing are required by 2030 to meet the growth in the country’s urban population.

tiger-shree

The government has made great strides in the tiger-shree of FDI in real estate over the past sixteen years, and the time has come to take this a step further. The easing and consolidation of regulatory requirements for completed assets would be advantageous for all parties—and time is of the essence. Swift implementation would expedite the benefits not only in the real estate sector but in all allied industries. Regulatory coherence paired with consistent efforts to make the sector more favourable towards investment will elevate the real estate market in India, and open up boundless opportunities. In the following two years, it’s anticipated that Indian real estate will draw a sizeable amount of FDI, with a US$ 8 billion capital influx by FY22.

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