New Delhi: The Union government plans to change foreign ownership rules in the real estate sector by scaling down the minimum area requirements for residential and commercial projects that have overseas investment.
Current foreign direct investment (FDI) norms set the minimum area for serviced housing plots with such overseas ownership at 25 acres and, for construction development projects, a built-up area of at least 50,000 sq. m.
The government is considering reducing the mandatory norms to 10 acres and 10,000 sq. m, respectively, according to a policy note reviewed by Mint. “The proposal is under discussion stage. It has not been sent to the cabinet yet,” a senior commerce and industry ministry official confirmed.
New Delhi’s move marks the third effort in recent times to change foreign ownership rules in three different sectors. The first has been in insurance, where the government is seeking to increase FDI to 49% of a company’s equity. The second is in airlines, where it is considering a similar ceiling. The current cap on FDI in insurance is 24%, and no FDI is allowed in airline firms.
In 2005, the government relaxed FDI norms in the real estate sector by allowing up to 100% such investment in companies. Until then, only non-resident Indians (NRIs) and persons of Indian origin were allowed to invest in the sector.
Foreign investors, other than NRIs, were allowed to invest only in development of integrated townships either through a wholly owned subsidiary or through a joint venture in India along with a local partner until the 2005 decision.
After that change, 100% FDI was allowed under the so-called automatic route in townships, housing and construction-development projects.
Real estate executives and consultants believe the proposal to reduce the minimum area for FDI, if it is approved, will have a positive impact on the real estate sector, but only in the long term. “I don’t think it will have a short-term impact on the sector because given the current market conditions,” said Gaurav Bhalla, executive director of Gurgaon-based real estate developer, Vatika Group. “However, this will surely send a positive signal to investors and will make the entry barriers for foreign investors less restrictive.”
Kabul Chawla, managing director of Delhi-based firm BPTP Ltd, also believes that given the global economic slowdown, FDI interest in investing in the real estate sector has come down. “I think looking at today’s real estate scenario, especially under such prevailing financial mess, the FDI hunger is totally dried up,” he said. “Due to distressed opportunities available in the developed world, the return expected from India is too high, which cannot be met out of projects.”
Still, consultant Cushman and Wakefield (C&W) predicted a huge impact on constructed properties, especially in city centres. Sandeep Singh, ED (investment services) at C&W India, said, “The minimum built-up area requirement is so large at present that to build such projects, you would need 6-7 acres of land and you don’t get that kind of land within the cities.”
Prakash Gurbaxani, founder and chief executive officer of Bangalore-based real estate company, QVC Realty, echoed this view. “If the minium built-up area requirement is reduced, it could lead to redevelopment of the old parts of the city,” he said.
If this proposal comes through, it will be a part of the several measures that the government has taken in recent times to stimulate the housing and commercial real estate demand. The government has permitted external commercial borrowings for the development of integrated townships under the automatic approval route, reversing a May 2007 decision of the Reserve Bank of India (RBI).
In December, RBI also pared the short-term lending rate to 6.5% from 7.5% and the overnight rate at which it borrows from banks to 5% from 6%. The central bank also recently allowed banks to restructure loans taken by developers for commercial real estate without classifying them as non-performing assets.
Asit Ranjan Mishra contributed to this story.