Doors wide open in India for property FDI.

By INDRAJIT BASU, UPI Business Correspondent  |  Feb. 25, 2005 at 5:32 PM
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CALCUTTA, India, Feb. 25 (UPI) -- In yet another reform move to deepen the economic liberalization process, India Thursda threw open the country's property and housing sector doors to foreign investors by allowing them to establish wholly-owned subsidiaries to construct housing projects without having to seek government approvals.

"The government has decided to allow FDI up to 100 percent under the automatic route in townships, housing, built-up infrastructure and construction development projects to catalyze investment in a vital infrastructural sector of the economy," Commerce Minister Kamal Nath said.

FDI has also been opened up for construction-development projects over 50,000 square meters including housing, hotels and resorts, hospitals, commercial premises and educational institutes.

However there is also an attempt to build a firewall against "vulture" foreign investors and small-time operators by not allowing investments in just land transactions and a minimum investment cap of $10 million in 100 percent FDI projects and $5 million in joint venture projects.

Until now, and only non-resident Indians and persons of Indian origin could invest freely and although foreign direct investment in property was allowed, conditions were tough. For instance, the minimum area they were required to develop was 40 hectares; a minimum of 2,000 houses or for at least 10,000 people; and, all projects had a lock-in period of three years. These restrictions meant that foreign developers could only work on plots away from cities as major cities in India could hardly provide the stipulated amount of empty space.

The new norms have reduced the existing 40-hectare stipulation to 10.

"India is a huge market for property funds with its growing economy and rising demand for space," said Anshuman Magazine, managing director of CB Richard Ellis, a real estate consultant. "The entry of foreign investors will increase the housing stock in the country. That is good news for consumers who will not have to pay higher prices."

The liberalized FDI regime, said Confederation of Real Estate Developers Association (CREDAI) in India, has the potential to attract huge amount of investments, but already overseas developers have increasingly started eyeing the Indian property sector aggressively.

According to CREDAI this state sector is set to see a capital infusion of more than $7 billion in the next 12 months, out of which as much as $5 billion have been committed by foreign investors.

"There is a serious interest of foreign players wanting to be a part of the real estate sector growth in India," says Deepak Bhavsar, Country Head-Research & Consulting of the Indian operations of the global consultancy firm Chesterton Meghraj. He added that although global property developers realized the potential of the Indian markets quite a few years back, they have been stymied by the country's "property related policies and the investment climate."

Indeed the interest is serious. Ever since India started liberalizing its economy in 1991 to embrace free market reforms a common refrain of the international property investors had been that though the country opened foreign investments in most crucial infrastructure sectors, it resisted allowing FDI in the property markets.

India said that it didn't because there were political compulsions, which feared that allowing foreigners to own property would be detrimental to the country's security. However realizing that its investments requirements are huge -- about $24 billion over the next five years according Chesterton Meghraj estimates -- and that development of the real estate segment is crucial for the country's economic, the erstwhile NDA government made a concession two years ago.

It permitted FDI in township development, information technology parks and special economic zones, and the hospitality sectors -- like hotels and guest houses.

However, that liberalization was half-hearted. For instance, although it allowed 100 percent FDI stake in a venture, it imposed stumbling block clauses like a minimum lock-in period of three years before repatriation of original investment is permitted, and a minimum of 50 percent project completion mandate within five years from the date of possession of land. Which is why there were few proposal in the initial years, and so were investments.

However, over the last six months there have been a slew of foreign construction groups seeking government clearance to invest in the country.

"There has been a significant progress on the demand side getting fueled by a booming economy, availability of cheap housing loans, and rising real estate prices across most parts of the country are spurring the foreign investor interest," says Sanjay Verma, joint managing director of Cushman and Wakefield, yet another global property consultancy firm.

But according to industry, there's another significant factor, which they call the China-factor, at play. Foreign investors have increasingly started eyeing the Indian property sector because the Chinese real estate markets are reaching some degree of saturation. And, according to Verma, "foreign investors are getting deterred by the structure of the Chinese real estate where majority of the land are leasehold and owned by the government. Foreign investors prefer to bet of freehold land which is available more freely in India than China."

Industry players say India offers a huge opportunity for FDI in property. "Cities like Mumbai are now witnessing an inner transformation where locked lands of closed industries are slowly being brought into the market," says Chesterton Meghraj. "A number of freehold plots of closed manufacturing units are being converted into apartments and retail and entertainment zones as well as attracting IT and ITES led office developments. This is a big opportunity."

The other big opportunity, say industry sources, is the involvement of state governments in large scale government projects like development of surplus lands of Mumbai Port Trust or even sick PSU lands.

"For that matter state governments have realized that they can make more money than just selling the lands off if they come into joint ventures private developers," says Bhavsar, who feels that this is an ideal opportunity for foreign investors because such arrangements reduces entry level costs for investors.

There are other attractions as well. "With a billion plus population the future opportunity is huge; no other markets is going to witness this kind of growth both in commercial as well as residential and retail markets," said Verma of Cushman and Wakefield.

"The industry has an average internal rate of return (IRR) on capital in excess of 30 percent, and it is not unusual for local developers to achieve IRR of as much as 50%."

Small wonder then that even Sam Zell, the largest United States landlord is sold on India. Zell who recently announced that he plans to replicate his famous Homex model in India said, "There's probably no better market in the world (than India) for low cost housing."

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