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4/6/2018

Real Estate: An emerging industry for FDI in India



FDI in the real estate sector is estimated to grow to USD 25 billion by FY22. By 2028, India’s real estate market size is expected to reach USD 853 Billion. 


In India, real estate sector has been unregulated and going through rough days for the last few years. Rising property rates, no clarity on REITs and FDI’s, ghost buyers and delay in construction projects are a few issues crippling the development of the sector. But with the recent foreign stints of PM Modi have made India as the most attractive investment destination in the world. India’s diplomatic trade relations with other countries have helped our country catch the attention of more FDI.

The government has undertaken a number of policies to ensure that the country remains the most attractive investment destination in the world. According to the country’s annual report card, FDI equity inflows to the services sector grew by 15% during 2017-18 (April-October). Mr. Anil Sinha, Global Impact Investing Network's (GIIN’s) advisor for South Asia has stated that Indian impact investments may grow 25% annually to US$ 40 billion from US$ 4 billion by 2025.



Image :- FDI Equity Inflows in Construction (Infrastructure) Activities Sector from 2005-06 to Dec- 17 (Source :- Data.gov, dipp.nic.in)

There was a lot of instability in the annual FDI inflows in Infrastructure Sector during the years of 2005-06 to 2016-17. It has been observed a drastic growth of 418.32% in FDI inflows in Construction Sector from $ 870.25 million during the period 2014-15 to $ 4510.71 million during 2015-16. In 2016-17, we can see a decline of -58.75% from $ 4510.71 to $ 1860.73 million during the period 2016-17. During April 2017-December 2017, FDI inflows in Construction (Infrastructure) Sector is $ 2540 million and we talk in the percentage term, the increase is 36.48% as compared with the FY 2016-2017.

The maximum annual growth of $ 4510.71 million was recorded in FDI inflow in Construction (Infrastructure) Sector in 2015-16 during the period under consideration. The maximum share of 11.28% was recorded in total FDI inflow in India in the year 2015-16 during the period under consideration.

FDI in the real estate sector is estimated to grow to USD 25 billion by FY22. By 2028, India’s real estate market size is expected to reach USD 853 billion, increasing from USD 126 billion in 2015. Take a look:




Image :- Real estate trends (Source :- ibef)


According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in the country has received Foreign Direct Investment (FDI) equity inflows to the tune of US$ 24.67 billion in the period April 2000-December 2017.Here are a few major investments in this sector:

  • In February 2018, DLF bought 11.76 acres of land for Rs 15 billion (US$ 231.7 million) for its expansion in Gurugram, Haryana.

  • In February 2018, Japanese conglomerate Sumitomo Corporation announced its US$ 2 billion partnership with Krishna Group to develop real estate projects in the country.

  • KKR India Asset Finance Pvt Ltd has invested over US$ 500 million in residential real estate projects in India in 2017, taking its total investments in real estate projects in India to US$ 1 billion. 

100% FDI under the Automatic Route

The recent announcement of the government’s decision to offer 100% FDI via automatic route will give a required impetus to the real estate broking services in India and it will receive a significant boost in foreign investments. 

Consolidation in the Real Estate Sector

According the some real estate industry veterans, RERA and other regulatory reforms have paved the way for the consolidation in the real estate market. The consolidation in the industry is primarily observed in the developer’s as well as property consultant’s market. Consolidation is essential for the efficiency of a real estate sector, as it is going to lead businesses to make their focus on the core operations and at the same time it will make them to be innovative. In addition, to make the real estate market more efficient and competitive, the next major step has been taken by the central government to offer 100% FDI via automatic route.

In India, property consultant a.k.a. broker plays an important role in the real estate market by considering the basic as well as lament requirements of the potential customer. With the help of the property consultants, one will not only able to find a perfect match but also one will be able to negotiate and provide assistance throughout the whole process of deal-making.

Earlier, many foreign companies would get an entry in the Indian market via a local Indian partner, because of the cap on FDI. However, this shareholding model might change, as many foreign companies can now entirely hold the property consultancy firm.

Advantages of the FDI policy in the real estate sector 

Introduced by RBI, here are a few advantages of the FDI policy which is as follows–

  1. Transparency: Growing competition would lead to better efficiencies and innovations in the sector. This will allow transparency, the reduced timeline of projects; build trust, and offers better experience in buying a house, property or land.

  2. India as Investment Destination: Those foreign companies who are looking for geographic expansion in their brokerage services will see India as a new investment destination.

  3. NRI investments: India will improve the scope and possibilities of NRI investors in the real estate market of India.

When the sector becomes more and more organized, the small and local brokers may not be able to scale up their services and eventually fade out from the system. There would also be a lot of consolidation in the market with the small players joining hands with the more established ones.  However, there would still be a lot of gaps left in brokerage service sector which can be capitalized by the new players.

Conclusion

Well, the World Bank has stated that private investments in India is expected to grow by 8.8 percent in FY 2018-19 to overtake private consumption growth of 7.4 percent, and therefore drive the growth in India's gross domestic product (GDP) in FY 2018-19. Policies are made so that it can improve the overall health of the business considering the requirements of all stakeholders and 100% FDI under the automatic route is one such move taken by the Government which will not only bring clean money into the system, but it will also pave the way for the entry of some of the foreign investments into the Indian real estate sector.

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