Impact of FDI Policy Changes on Real Estate

Impact of FDI Policy Changes on Real Estate

In 2005, the Government of India first opened up the Real Estate sector to Foreign Direct Investment (FDI), when 100% investment was allowed in townships, housing, and built-up infrastructure and construction developments since 2005, subject to certain conditions related to the minimum area under development, minimum investment and the buy‐in period.

Impact Of Fdi Policy Changes On Real Estate
Impact Of Fdi Policy Changes On Real Estate

This relaxation led to huge investments in the real estate sector, with FDI inflows in real estate accounting for 10% of all the foreign direct investment in the country, leading to the fast development of real estate in the country. However, the growth hit a plateau around 2011 – 12, with real estate prices hitting all‐time highs, discouraging buyers from investing, and bringing the entire sector into a slowdown mode.  Several reasons have been cited for this slowdown, the major ones being: ‐

A) The limitations set by the Government of India regarding the minimum investment amounts and the lock‐in periods made it unviable for foreign investors to invest, as projects were not getting completed and the investors were unable to get their returns.

B) The prices of land and other materials required for construction of the projects skyrocketed, and because of the drying up of foreign investment, developers are cash strapped and finding it difficult to complete projects.

C) Because of inflation and other factors, overall prices of property have increased, which is making buyers reluctant to invest in the sector right now, leading to surplus development that is going unused.

Since Real Estate is one of the most important sectors of the economy, and to fulfill the current Government’s aim of “Housing for all by 2022” and development of the 100 smart city mission, the Narendra Modi has revised the FDI policy on Real Estate to make it more conducive for foreign investors to invest in the country. Some of the main features of the revised policy are: ‐

A) The minimum floor area for projects eligible for FDI has been reduced to 20,000 square meters as compared to the earlier minimum of 50,000 square meters.

B) The minimum capital requirement for FDI has been reduced to USD 5 Million from USD 10 Million.

C) Though the Government has still imposed a time limit of 3 years on these investments, keeping in mind the typical development time of a project, the investment can enter when the project begins and leave when it gets completed, giving more flexibility to the investors.

But what do these changes entail for real estate brokers as well as end‐buyers? As is typical and expected, there can be pros and cons of foreign direct investment, but mostly the mood is positive and so is the expectation from the results. Here’s what brokers can expect: ‐

A) The relaxation of FDI policy is expected to bring in a lot of foreign investment, which will allow developers to complete existing projects as well as hit no roadblocks in the development of new projects. This is expected to improve the sentiment among the buyers, making it easier for brokers to sell properties, leading to a direct increase in business.

B) However, FDI is usually also accompanied by inflation, which may lead to a further increase in real estate prices, making buyers even more tentative. Brokers need to be prepared for such scenarios and adjust accordingly to motivate buyers.

C) The increase of foreign investment may also make it difficult for domestic companies and agents to survive in the market, and brokers must prepare, develop their skills for such an eventuality to ensure business carries on as usual.

D) These measures, accompanied by the Real Estate Bill will bring in more transparency in the market, thereby improving buyer sentiment. Brokers must make themselves aware of the nitty gritties of these bills and make sure they fulfill all the requirements to legally do business.

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