Real Estate Opportunities in India
FOREWORD
"Undeniably tremendous" is how the Investment in Indian real estate is termed. Government of India has recently allowed Non Resident Indians (NRIs) to invest upto 100% (FDI) in Housing and Real Estate Sector for development of serviced plots, construction of built-up residential premises and commercial premises including business centers and offices; development of townships, city and regional level urban infrastructure facilities including both roads and bridges; investment in manufacture of building materials; and investment in participatory ventures in development of serviced plots, construction of built-up residential premises and commercial premises including business centers and offices; and development of townships.
POTENTIAL FOR GROWTH
Real Estate sector is considered as a great employment generator and could be instrumental in growth of cement, steel and other connected industries. A study reveals that for every one crore (10 million) rupees of investment in housing, nearly 290 industries in the building material sector get activated besides the core manufacturing sector constituting cement, steel and bricks. Therefore, investment in housing is capable of achieving a three-in-one solution of employment generation, economic development and human development. Real estate development in India is estimated to be in the region of USD 12 billion, growing at a pace of 30 per cent each year.
Almost 80 per cent of real estate developed is residential space and the rest comprise office, shopping malls, hotels and hospitals. This double-digit growth is mainly attributed to the off-shoring
business, including high-end technology consulting, call centres and programming houses.
INVESTMENT OPPORTUNITIES
Money invested in real estate offers both a regular return on investment as well as a possibility of capital appreciation. With the tax reform measures taken in the last few years, the real estate is considered to be the most lucrative investment sector in the coming years.
Opening up of 100% Foreign Direct Investment (FDI) in the real estate sector, setting up real estate mutual funds coupled with other fiscal reforms like rationalization of stamp duty, property taxes etc. initiated by the Government are steps taken to continue to make the real estate a promising investment option.
The first FDI project for Rs. 100 crore (1 billion) residential township in Gurgaon, North India has already been approved by the Government. It is estimated that urban housing sector would require investments of USD 25 billion over the next five-year period. Urban population is expected to grow from 290 million to 600 million by 2021, while the requirement for housing units will grow to 68 million by 2021. At present, India has only about 19 million housing units. As per a study conducted by the United Nations, by the year 2015, 10 of the world’s largest cities will be in Asia (excluding Japan) and three of these will be in India. The projection suggests that the demographic growth will be high and the country is poised for rapid urbanization, which will lead to major developments in real estate and infrastructure projects. The advent of call centers, programming houses and other such BPOs in India has led to an influx of over 785,000 newimpact has been the demographic shift characterized by rising disposable incomes and increased consumerism. The real estate market in India predominantly continues to remain unorganized, fairly fragmented, mostly characterized by small players with a local presence. Traditionally, developers were viewed with an element of scepticism. Developers were often identified with dealing with large amounts of unaccounted money, lacked transparency and would use unscrupulous means to obtain various regulatory approvals. Lending to developers was perceived as being risky as builders were known to borrow for one project and utilise it for another or overstretch their limits and not have sufficient funding to complete the building. But things have clearly changed today: for starters, developers have realized the merits of corporatising themselves and enhancing transparency in terms of their financials. While earlier even the reputed builders had difficulty accessing formal channels of credit, today almost every bank and housing finance company has relationship tie-ups with developers and are keen to lend to them at competitive rates. Lenders are also monitoring the projects more closely. For instance, lending to developers is often through an escrow mechanism which ensures that funds are utilised only for that particular designated project.
authorize the Union Parliament to legislate.
The Ministry of Urban Development & Poverty Alleviation is the apex authority of Government of India at the national level to formulate policies, sponsor and support programmes, coordinate the activities of various Central Ministries, State Governments and other nodal authorities and monitor the programmes concerning all the issues of urban development and housing in the country The national policy issues are decided by the Government of India which also allocate resources to the State Governments through various centrally sponsored schemes, provides finances through national financial institutions and supports various external assistance programmes for housing and urban development in the country as a whole. Policies and programme contents are decided at the time of formulation of Five Year Plans. Further, the fiscal, economic and industrial location decisions of the Government of India have an indirect effect on the pattern of urbanization and real estate investment in the country.
FOREIGN DIRECT INVESTMENT (FDI)
The Foreign Exchange Management Act (FEMA), 1999 is the gateway legislation of India for inbound investments into India. The Income Tax Act, 1961 is the direct tax legislation of India.
Presently, FDI upto 100% under the automatic route has been permitted in townships, housing, built-up infrastructure and construction development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure). There is no need for taking prior approval from the Government, but the RBI should be informed within thirty days of the inward remittances or issue of shares to NRI.
The FDI in the above-mentioned areas is subject to the following conditions:
1. Minimum area to be developed under each project would be as under:
i. In case of development of serviced housing plots, a minimum land area of 10 hectares.
ii. In case of construction-development projects, a minimum built-up area of 50,000 sq.mts.
iii. In case of a combination project, any one of the above two conditions would suffice.
2. The investment would further be subject to the following conditions:
i. The minimum capitalization shall be US$10 million for a wholly owned subsidiary and US$5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the Company.
ii. Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB.
3. A minimum of 50 per cent of the project must be developed within a period of five years from the date of obtaining all statutory clearances. The inventor would not be permitted to sell undeveloped plots. The term undeveloped plots means, where roads, water supply, street lighting, drainage, sewerage and other conveniences, as applicable under prescribed regulations, have not been made available. In order to dispose off serviced housing plots, it is necessary that the investor provides this infrastructure and obtains the completion certificate from the concerned local body/service agency.
4. The development to be in accordance with local byelaws, town planning norms, standardsand master plans.
5. The investor shall be responsible for obtaining all necessary approvals, including those of the
building/layout plans, developing internal and peripheral areas and other infrastructure facilities,
payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/bye-laws/regulations of the State Government/Municipal/Local Body concerned.
These conditions have been put to discourage fly by night operators from entering this sector. These conditions are the guiding factors for according approvals. Further, Non Resident Indians (NRIs) are allowed to invest in the following areas in the Housing and Real Estate Sector under the Automatic Route of FDI:
i. Development of services plots and construction of built up residential premises.
ii. Investment in real estate covering construction of residential and commercial premises including business centers and offices.
iii. Development of townships.
iv. City and regional level urban infrastructure facilities, including both roads and bridges.
v. Investment in manufacture of building materials.
vi. Investment in participatory ventures in (i) to (v) above
vii. Investment in housing finance institutions.
REPATRIATION
The repatriation of principal investment of foreign exchange is permitted, but not before three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the foreign investment promotion board (FIPB).
