EASING OF FDI TO BOOST THE CONSTRUCTION SECTOR Amit Sethi The recent announcement related to FDI norms has been welcomed by the real estate industry as it helps in getting more investment for growth The recent announcement by the government of India to relax the FDI norms, has been lauded by the real estate sector across the country. The announcement has taken into consideration the proposals made by the DIPP and there has been a relaxation in norms related to the built-up area, capitalisation and lock-in period. “The real estate sector has been witnessing a cash crunch over the last few years. FDI investors have been shying away from aggressive deployment and one of the many other restricting factors, was a minimum area requirement of 50,000 sq m. This tends to be restrictive since most often, the only qualifying options available would be large projects on city outskirts. These locations take a longer time-frame to sell and often at lower profit margins, thus, adversely impacting IRRs. With the easing of the minimum area requirement from 50,000 sq m to 20,000 sq m, and the reduction of the minimum capitalisation from USD 10 million to USD 5 million, FDI investors will be able to find investment opportunities within city-centric limits, with a quicker turn-around to exit with better returns. This will help ease, as well as increase project financing, with additional funding options for real estate development. It will also increase the supply in Central Business Districts (CBD) locations, thus, keeping a check on ever-increasing capital values,“ said Suresh Castellino, national director, Investment Ser vices,Colliers International. EASING IN FDI TO HELP IN ADDRESSING THE DEMAND FROM ALL SEGMENTS Experts pointed out that one of the most important factors affecting the prices in the real estate sector in India, is the availability as well as the cost of capital. Sometimes, as much as 30 per cent of the total cost can be attributed towards the financing cost. Lack of available options for cheaper finance tends to increase the cost of the project substantially, which effectively translates into a rise in prices. The easing of FDI in the construction sector makes available a larger pool of financing, thus, moving towards rationalisation of the cost of funding. Easing of FDI will also positively affect the cost, hence, the pricing across the sector, especially affordable housing. With additional capital available for this sector, it will incentivise the developers to take up affordable housing projects, in addition to boosting demand and affordability due to reduced prices. Anshuman Magazine, chairman and MD, CBRE South Asia Pvt Ltd, said, “Low-cost, affordable housing projects are to be ex empt from FDI restrictions according to the Union Budget announcements, and the government has allocated USD 665 million to the National Housing Board (NHB) to fund cheap mortgages for low-cost urban housing units. An additional USD 1.3 billion has been allocated for a rural housing scheme. Relaxed funding norms may spur investment in affordable housing schemes, particularly since the new provisions for cheap loans will increase the saleability of residential units. Subject to the conditions stipulated in the new FDI norms, construction of af fordable housing projects shall get a boost.“ The benefits of easing in FDI will reach the non-urban, undeveloped and rural areas by making smaller-sized initiatives more feasible; the FDI rule changes will increase developers investment options and may drive development activity in lower-tier cities, where investors previously found it challenging to source suitable developments sized 50,000 sq m and above. “The requirement in the non-urban, undeveloped and rural areas, is for low-cost housing and for serviced plots with infrastructure. The earlier FDI norms did not offer additional benefits of low-cost housing. Moreover, the minimum capitalisation of USD 10 million was too high for the non-urban, undeveloped and rural areas. As a result, viability in these locations was a challenge. With the reduction in minimum capitalisation to USD 5 million projects in non-urban, undeveloped and rural areas, are more feasible. Additionally, a major booster for these areas is that the minimum capitalisation and minimum area compliance will not apply to low-cost housing projects. This will allow foreign capital inflow into small-ticket projects developed by mid-sized and smaller developers having good track records, and boost affordable housing in the country. Projects committing more than 30 per cent of the cost towards the development of lowcost housing and projects using at least 60 per cent of the FARFSI for dwelling units of carpet area not more than 60 sq m, will be considered as affordable housing projects,“ added Castellino. Experts point out that the government should also take initiatives on modifying land acquisition norms, making them more industryfriendly; besides trying to promote transparency in the sector by generating a political consensus around the creation of a national real estate regulatory authority. QUICK BYTE LOW-COST, AFFORDABLE HOUSING PROJECTS ARE TO BE EXEMPT FROM FDI RESTRICTIONS, ACCORDING TO THE UNION BUDGET ANNOUNCEMENTS, AND THE GOVERNMENT HAS ALLOCATED USD 665 MILLION TO THE NATIONAL HOUSING BOARD (NHB) TO FUND CHEAP MORTGAGES FOR LOW-COST URBAN HOUSING UNITS. Source : Times Of India
Posted on: Thu, 13 Nov 2014 05:06:06 +0000
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