Real Estate

Foreign Direct Investment

Real Estate . . .

A Valuable Proposition

In recent past, the speed with which the nation is prospering, the Real Estate sector has made tremendous progress. India has been very successful to grab the attention of investors and more importantly India has given them back excellent returns. Real Estate has been of huge importance to take India to new heights….

Generally no person resident outside India can make investment in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not, which is engaged or proposed to engage in real estate business or construction of farm houses.

The Real Estate Sector is one of the fastest growing sectors in India and has occupied a very important role in itself. India’s population growth as well as rapid economic progress fostered by the government policy, resulted in exceptional demand for high quality residential and commercial Real Estate development. Thus to balance the demand, government has opened its doors for various sources in real estate sector; FDI being the lead of the stream.

Era prior FDI liberalization in India

Indian real Estate sector was primarily a seller’s market, subjugated by a few prominent players who were against foreign investment & their interference in this sector. It was believed that these MNCs would wipe the market clean riding high on deep pockets and higher technical know-how. One argued that ‘our’ attempts to match ‘them’ would be of no competition against strong capital support providing them the ability to absorb unlimited losses. Some players also felt that foreign players with aggressive marketing strategies would aim at squeezing out competition through high decibel advertising and promotional campaigns.

Notification

Foreign Investment in India are governed by sub section (3) of section 6 of the FEMA Act, 1999 read with Notification no. FEMA 20/2000-RB, dated May 3, 2000, as amended from time to time.

Guidelines & Press Note to Real Estate Sector in India:

The Government of India has set up certain guidelines for investors willing to apply for FDI in real estate sector, which has conditions like area, investment options and target for completion of a project. Following are some important guidelines to be followed:-

Minimum area

· In case of development of serviced housing plots, 10 hectares (25 acres)

· In case of construction-development projects, built-up area of 50,000 sq m.

· In case of a combination project, any of the above two conditions

Investment

· Minimum capitalization

o for wholly owned subsidiaries - US$ 10 million

o for Joint Venture (JV) with Indian partners - US$ 5 million–, to be brought in within 6 months of commencement of business.

· Original investment cannot be repatriated before a period of three years from completion of capitalization.

· The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB).

Time frame & rules

· At least 50 per cent of the project to be developed within five years from the date of obtaining all statutory clearances. The investor would not be allowed to sell undeveloped plots.

· The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities as laid down by the concern Authority.

· The Investor shall be responsible for obtaining all necessary approvals, payment of development, external development and other charges and complying with all other requirements as prescribed under bye-laws of the State Government/Municipal/Local Body concerned.

· The State Government/Municipal/Local Body concerned would monitor compliance of the above conditions by the developer.

FDI in Indian Real Estate and Economic Growth

With this change in the government policy on FDI, all real estate sectors, residential, commercial and retail are currently witnessing huge growth in demand. India, during the first half of 2005-06 fiscal has attracted more than three times foreign investment at US$ 7.96 billion during making it amongst the "dominant host countries" for FDI in Asia and the Pacific (APAC).

India in the next five-year period is estimated to require investments worth US $ 25 billion with the urban housing sector. This again has opened up opportunities for foreign investments in the realty sector. The Central government allowed up to 100% FDI for setting up townships in 2002. However, the flow of FDI investments has been dissatisfied by the 100 acre criterion; since acquiring such a large portion of land was impossible in metropolitan cities and even satellite cities and state capitals.

But a landmark decision taken by the Union government in 2005, where the minimum land area for development by foreign investors was lowered from the earlier floor of 100 acres to 25 acres has thrown open the lucrative parts of the Indian realty market to global investors. Another perceptible spin-off of the easing of FDI policies will be the impact on quality and inevitable acceleration in construction activities.

Foreign Direct Investments in the real estate sector in India would also contribute towards making the sector more organized. Besides increasing professionalism in the sector, it would bring in advanced technology and help in the creation of healthy and competitive market environment for both domestic and foreign investors.

Present Scenario of the Sector

Union Finance Minister, Shri P. Chidambaram has approved 32 Foreign Direct Investment proposals recommended by Foreign Investment Promotion Board (FIPB) in its meeting held on 20th October, 2006. The approvals amount to Rs. 249.81 crore. The proposals relate to multiple Ministries/Departments, with the major investment proposals pertaining to the departments of Commerce, Economic affairs, Heavy Industry and Information & Broadcasting.

A report indicates that the real estate market in India is on a high growth curve. Property development has surged in India driven by an annual doubling in demand for office space driven by the IT sector in Mumbai, Delhi, Bangalore, Hyderabad and Chennai. Recent policy measures have also opened up foreign investment in the real estate sector, which for a long time lacked institutional funding support.

The liberalization of FDI norms has brought healthy competition into the market which forced domestic players to stand up and take notice of the quality of service and products on offer in the global market. Further, these foreign investors ventured into newer segments thereby opening up newer opportunities for Indian players as well. This has gone a long way in ‘cleaning’ up Indian realty practices & procedures and ‘CORPORATISING’ Indian real estate. Though FDI have given raise to several opportunities to Indian real-estate sector economically, it also has a impact in itself as a dread of domination of foreign market in India.