Festive Bonanza for Indian Real Estate sector

The foreign investments in the real estate sector in India have been stagnating for a long period of time; for some investors since the last cyclical high of 2006. The FDI restrictions prevented foreign outflow of capital for real estate projects that did not meet the necessary criteria such as requirement of minimum capitalization, minimum construction area, etc. The projects have not made progress due to a variety of reasons ranging from scarcity of capital to regulatory approvals required for construction projects in India.  The investors have been wary of increasing their investments in the existing projects and bring them to completion due to policy paralysis. Due to this, the foreign inflow of capital into real estate sector was mainly coming into India through the FPI route via NCDs.  Debt exposure to real estate was preferred over equity participation due to the FDI conditions in real estate sector and the burden they would entail on the foreign investors.  The relaxations in the FDI conditions can encourage investors to provide the much needed fillip of sharing risk and earning higher returns on their investments in real estate sector.  This could also have a positive impact on the sector due to real estate being a capital intensive industry.

The Modi Government had taken office with primary agenda of boosting ease of doing business in India to attract capital spend and grow the GDP of the Country.Recent initiatives in the form ofamendments to the FDI Policy by the Government are worth a note in relation to the support extended to the real estate sector.

On 10^th of November, 2015, the Government has done away with the restrictive FDI conditions which prevented foreign investors to exit their investments in the real estate project before its completion which is a master stroke. The recommended changes in the FDI Policy have dealt with the investors long time concerns effectively.  The restrictive FDI conditions such as mandatory development of minimum floor area of 20,000 sq. meter per project and minimum infusion of FDI of USD 5 million within 6 months have been removed which could facilitate the Government’s initiative on affordable housingin India for all by 2022. The FDI amendment further states that each phase of the construction development project would be considered as a separate project for the purpose of FDI policy.  This amendment to the FDI policy will facilitate simpler entry and exit for foreign investors linked to their risk participation in the specific real estate project in India.

Earlier, foreign real estate investments into large projects would stagnate for large periods of time, due to the gestation period of the projects and prevent the investors from exiting in a timely fashion.  As per the new amendment, Foreign investors can exit and repatriate foreign investment even before the completion of the project under automatic route subject to the 3 year lock-in for every tranche of foreign investment or after the completion of trunk infrastructure.  The exit will be in coherence with protecting and respecting the commercial arrangement between the developers and the investors and also to evade the early flight of capital. 

The FDI Policy has further enabled simplified exit of foreign investors by exchange between two non-resident investors abroad.  TheFDI Policy states that transfer of shareholding from one non-resident to another non-resident, without repatriation of investment will neither be subject to any lock-in period of 3 years nor subject to any Government approval as was previously required to be sought from the FIPB for any NR to NR transfer which was not forthcoming.

Also, the DIPP has now clarified that earning of rent / income on lease of the property will not amount to ‘Real Estate business’.  The ‘Real Estate business’ (i.e. dealing in land and immovable property with a view to earning profit therefrom) as previously defined in the FDI policy prohibited FDI in such business activity.  Accordingly, FDI would now also be permitted in completed projects where the intention is to earn rental income. This will allow large Indian developers the flexibility to sell their portfolio of developed assets and deleverage their balance sheets. This will also benefit several operating companies with large real-estate holdings to monetize their non-core real-estate holdings. Further, this move will enable exit opportunities to investors and attract facility management and leasing entities to invest in these projects.

The Union Cabinet under the aegis of Prime Minister Modi has also recently approved the amendments to the Real Estate (Regulation and Development) Bill, 2013.  The Bill deals with the core problems of the real estate industry such as opaqueness and protection of investors interests. The bill is definitely levered towards the interest of the investors / consumers. 

Further, the real estate community has been given an additional impetus by the Government by allowing raise of debt by issuance of Rupee denominated bonds overseas.  Eligible borrowers can be any body corporate, REITs or InvITs.  Further, the end-uses of the proceeds have been expressly permitted for construction and development of townships and affordable housing projects.  The maximum amount that can be raised under the automatic route has also been extended to USD 750 million per annum.  The RBI circular has clearly expanded channels of debt funding in Indian entities for land purchase and for construction and development of township and affordable housing projects with no exposure to foreign risks.

With a recent FEMA amendment, REITs have also been afforded the advantage of accepting domestic investment without attracting the laws of the FDI Policy.However, the only hurdle for REIT to see the light of the day is the issue on Dividend Distribution Tax (DDT) which may be taken up in the forthcoming budget by the Government making way for the REIT to become a reality.

The recent changes in FEMA will encourage and boost the investment sentiment in India which being generally considered as a difficult destination for real estate investments and proliferate future foreign capital inflow in the sector.