Mumbai: India’s real estate sector needs greater transparency and transaction integrity to attract sovereign wealth funds that are paying more attention to property investment, consultants and sector analysts say.
The sector is seeking key reforms that will ensure smoother acquisition of land and remove regulatory uncertainties that are are deterring sovereign funds from venturing into the country, they said.
“If India could do better in terms of transparency and also the required reforms to boost investor confidence, the country will certainly be able to grab more funds from overseas investors,” said Nick H. Thomlinson, the outgoing group chairman of Knight Frank, a real estate consulting firm.
A three-year lock-in period is too long for funds with a short-term investment horizon, said Anshuman Magazine, chairman and managing director, CBRE (formerly CB Richard Ellis), South Asia. “Providing easier exits and improving the overall infrastructure will make India attractive,” he said.
Sovereign wealth funds are state-owned investment vehicles that manage their countries’ surpluses from exports such as commodities. Such funds had as much as $5 trillion under management in 2012, according to Knight Frank research data.
A 7 February Bloomberg report said sovereign wealth funds spent $10 billion on real estate in 2012. While lower than the $13 billion they invested in the previous year, property made up 21% of all sovereign fund investments in 2012, the highest percentage on record, the report said.
The Indian real estate industry has experienced a slowdown in terms of foreign direct investment (FDI) this fiscal. According to the latest data available with the ministry of commerce, the sector drew only $ 1.01 billion in the eight months ended November, compared with $3.141 billion in all of the year ended 31 March 2012.
“The confidence of foreign investors, in general, has dropped because of policy uncertainty regarding taxation, negative outlook by S&P (Standard and Poor’s) and too much negativity around growth,” said Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield India Pvt. Ltd, another real estate consultant.
India has a “BBB -” rating, the lowest investment grade, from rating agency S&P, the lowest among the BRIC (Brazil, Russia, India, China) economies. The Central Statistical Office has forecast gross domestic product (GDP) growth of 5% this year, the lowest in a decade and down from 6.2% n the previous fiscal.
According to a recent Knight Frank report, of late, most property investments by pension funds have focused on mature core markets in Europe and North America, although the emerging property markets such as the BRIC have also seen greater interest, as market transparency improves and curbs on foreign investment are lifted.
Thomlinson of Knight Frank said a revival of sentiment in the real estate sector will take place in the next 12 months and that will turn around the market.
The industry is betting on the reform measures the government is planning to introduce, which will ensure smooth acquisition of land under the Land Acquisition, Rehabilitation and Resettlement Bill, 2011, and remove some of the regulatory uncertainties through the Real Estate (Regulation and Development) Bill, 2011.
According to Shishir Baijal, country head at Knight Frank India, the reform measures may be tabled in Parliament in the next session or two, and will change sentiment, especially among overseas investors asking for more transparency.
People like Dutt feel such steps aren’t sufficient and say India needs a re-orientation of its foreign direct investment (FDI) policy to attract foreign funds.
Investors are also watching for signs of a pick-up in investment options such as real estate investment trusts (REITs), which directly own income-producing assets and provide a trading avenue to investors, said Baijal. Currently, India doesn’t allow foreign participation in already developed properties; if the doors are open, that will make India attractive to foreign funds by easing exits, said Magazine.
Market regulator Securities and Exchange Board of India (Sebi) issued draft REIT regulations in 2008. But confusion on guidelines, lack of transparency and uncertainty in the conduct of real estate business has delayed the establishment of the REIT investment structure. The industry is hopeful that once regulatory clarity emerges, investor demand for REITs will increase.
“If REITs come in rental housing, that will be a new trend keenly watched by investors all over the world. So, for long-term, India is a compelling story to have,” said Baijal.
According to Knight Frank, REITs tend to generate a stable and consistent income stream for investors. In India, in case of commercial properties, the rental yield hovers around 9-12% per annum and residential property averages around 2-3% per annum, states the report.
The sector is also betting that the move to open up multi-brand retail to chains such as Wal-Mart Stores Inc. and easier norms for single-brand retailers such as Ikea will make the real estate market attractive to foreign investors.