Relaxed norms to boost realty investments in small cities & enhance PE exits: Experts

The government's move to ease norms for foreign direct investment (FDI) in construction sector has cheered the real estate fraternity but experts opine that it may not help the government push through its objective of boosting affordable housing as that may require more incentives for developers.

While the finance minister had signalled the proposed moves in his maiden budget in July, the Cabinet has now approved the proposal to bring down the size of FDI compliant realty projects to 20,000 sq m from 50,000 sq m Accordingly, minimum capital requirement for a realty project to attract FDI has been halved to $5 million. The government has also relaxed exit norms for PE investors, for projects completed ahead of a three-year lock-in.

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Although most realty private equity firms tend to invest in medium to large scale projects and the move may not lead to immediate jump in investments in small projects, the relaxation allows them to diversify their portfolio. So far, most PE firms have shied away from investing in smaller cities but the relaxation can allow them to invest in tier II and tier III cities where developers construct smaller projects.

“Though it will not make material difference for the private equity firms, it will give them flexibility to invest across a variety of projects and the option of going to tier II cities to back smaller projects,” according to Sunil Rohokale, managing director and chief executive officer, ASK Group, which has a string of realty funds in investment or fundraising mode.

He said the move to do away with three-year lock-in period will help investors churn out liquidity in the middle of the life of the project and re-invest and rotate that money.

“The sector has been reeling through an acute funding pressure. Investors were shying away due to ambiguity in rules and regulations. Also, they were not keen on locking their funds for longer period. With these reforms in place, they would now be able to manage their fund quite well,” said Rohit Raj Modi, secretary, CREDAI-NCR and director, Ashiana Group.

Neeraj Bansal, partner and head, real estate and construction sector, at consultancy firm KPMG in India, believes that relaxation of FDI norms is expected to provide an immediate breather to the cash-strapped real estate sector.

“The reform would now allow foreign investors to invest in smaller projects spread over land parcel of about three-four acres,” he said.

At the same time, analysts feel that before we expect more money to come in, a lot of money that flowed into the real estate sector in the boom period has to go out.

“I don't see this having a massive impact on the flow of funds to Indian real estate market," ASK Group's Rohokale said.

Another flip factor is that the flow of money is more dependent on organic demand for housing units coming back on the back of positive macro indicators and the real estate sector as a whole bouncing back.

“Once the real estate sector is back on track with better economic indicators, these initiatives will go a long way in creating a positive impact on the sector,” according to Rajeev Rajeev Bairathi, executive director, capital markets, real estate advisory firm Knight Frank India.

A major portion of the developer fraternity is going through a liquidity crunch on the back of slow sales across the country. In the note released by the government on Wednesday, it said the sector witnessed steadily rising foreign direct investment from 2006-07 to 2009-10 after which the levels of inflows have been much lower. The move is aimed at stepping up investment in construction development.

Calling it a step in the right direction, David Walker, managing director, SARE Homes, said India needs big reforms that are required to attract approximately $1 trillion over five years (2012-17) to overhaul its infrastructure sector such as ports, airports and highways to boost growth. “Buying a home is one of the best investments available; so encouraging families to buy via finance offerings is good policy. With progress on these fronts, FDI investment will naturally flow to India, attracted by the tremendous potential of the size of the population, increasing earnings and urbanisation.”

Easing of FDI norms marks another move by the government to boost real estate sector which is reeling under the pressure of slow sales and therefore liquidity challenges. In another move to give a leg-up to the industry, the capital market regulator Securities and Exchange Board of India (SEBI) recently came out with final set of guidelines for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs).

Clarity on REITs and easing of FDI norms for realty projects had formed an important part of the wish list of industry bodies in their presentations to the government.

Meanwhile, realty stocks jumped on Thursday on the back of the policy move. At the close of market hours, the S&P BSE Realty index rose 3.44 per cent outperforming the 30-stock benchmark index Sensex.

Low cost housing

KPMG's Bansal points out that removal of restriction on investment in affordable housing projects is expected to usher development of low-cost housing and slum-rehabilitation projects.

But not all are so bullish. Knight Frank's Bairathi says contrary to the expectation that the move will be a step ahead in the initiative of the government to provide affordable housing for all by 2022, there are road-blocks that need to be removed.

“Cheap availability of raw material, which is land in this case, is of prime importance for creating affordable housing. And the government will have to make subsidised land available for such projects to kick off,” he said and added that once that is in place, funding will flow in automatically.

“On a broader-level, the move is an amiable step and will benefit fund managers who are raising India-focused funds. However, the argument that it will help in the creation of affordable housing is too far-fetched,” said Rohokale.

(Edited by Joby Puthuparampil Johnson)

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