FDI in Indian Real Estate - Boon or Bane?

Real Estate market in India is one such asset that people would want to have in their portfolios. And not just as an investment but also as a necessity. In my article Is Price Correction Imminent in Indian Real Estate I had discussed that prices in real estate have stagnated and this should benefit the home buyers. Well that was 6 months back. It now seems that government is determined to not let this happen. The new government has shown a clear intent to boost this sector by easing the FDI norms in Real estate, saying that the move would benefit the cash-starved developers raise investments from foreign funds to take up new projects and also to successfully complete the stuck projects. Now we all are aware that real estate developers tend to divert the money of one project to kick-start a new project thereby keeping the previous one hanging in the air. Instead of penalizing such acts, government is boosting this kind of practice by creating more avenues to raise funds from the market. 

                   FDI Equity Inflows in India (Source: DIPP.nic.in)

First the introduction of REIT and now the easing of FDI norms, this will lead to huge amount of FDI inflow in the sector. The changes in FDI norms include:

• The company investing the fund can now bring minimum FDI of $5 million only within 6 months of start of the project. Previously the constraint was for $10 million. Any additional investment can be brought in within 10 years or before completion of the project , whichever is earlier
• Also the minimum area required to bring in FDI investment has been reduced from 50,000 sqm to 20,000 sqm

Though thanks to the little discretion on the part of the present government, the norms for 3 year lock in period has been kept intact. Else what would be the difference between FII investment and FDI investments.

One good change though is that there is further relaxation in FDI norms when it comes to affordable housing. In fact, the government has removed the restriction with respect to minimum area as well as capitalization if 30% of the project cost is kept for affordable housing.     

You pick up any report published by real estate stalwarts such as JLL and KnightFrank and you are sure to find some mention of huge inventories that exist in every city. In cities such as Mumbai and Gurgaon, the number is so huge that with current rate of absorption it would take more than 5 years to sell all the existing flats. The prices of apartments are at its peak as well as for Land that has been rising crazily over the years based on speculation. This was probably one of the reason why in my article Is Price Correction imminent in Indian Real Estate I had mentioned that developers would be forced to sell their flats at a discount. Who knew that our government had a different plan altogether.  

Not just huge inventory piling up, but with change in Land acquisition norms the land availability has gone even scarce and it has turned these asset owners even more demanding thereby further boosting the already existing speculative price. In addition, cost of raw materials is on the rise more than ever. Higher cost and low sales due to high prices has created an impasse in this industry.

I personally felt that now would be the right time for the developers to reduce the price to lighten the burden of increased inventories from their shoulders. After all, this is what every end user wanted. Please note that I have used the word end-user and not investor! Who knew that our dreams would be shattered by the new policies of the Government! After all, our salaries are not increasing at the same rate as FDI in the market.