It could be safer to buy a property in a project that has foreign direct investment (FDI) rather than one funded completely by developers as FDI in real estate sector has a lock-in period of three years.
Why this lock-in period
When the downturn hit the markets in mid 2008, many realty funds operating in India, both domestic and foreign, stopped funding the remaining project under construction. Many even exited the Indian market selling their stake to other entities. This led to project delays which directly affected homebuyers and investors.
Therefore to safeguard the interest of the investors, developers and homebuyers, the Indian government in September announced that there will be a three year lock-in period on overseas money and will apply to each tranche of investment. For instance, if a realty fund plans to invest in two tranches, each part will have to remain invested for three years from the date of investment. Investors are permitted to exit earlier only with approval from the Foreign Investment Promotion Board.
History of FDI inflow
The government in March 2005 amended norms to allow 100% FDI in the real estate market. The move boosted development of real estate sector in the country. This encouraged several large private equity firms to launch India-specific funds that partnered with Indian realty funds to develop housing and commercial projects. They primarily set up special purpose vehicles in association with developers or land owners. A minimum capitalization of Rs 48.5 crore is required to set up a wholly owned subsidiary and Rs 22.86 crore for joint ventures with Indian partners.
If a project has FDI involved, the developer will have sufficient money to complete the construction on time. Also, since the foreign investor keeps a track of the money spent and progression of the project, generally the construction quality is high.
Since such borrowings are at high cost, developers pass on this cost to the customers by putting a high price tag on the apartments. These projects are priced higher than the prevalent market rate in that area.