The Importance Of FDI For Indian Real Estate..!

By Mr. Shobhit Agarwal, Jones Lang LaSalle India

Project Costs Moving Northward..!

While banks have aided most real estate development in the past, the cost of debt is getting higher by the day. The strict guidelines introduced by RBI have made real estate lending even more expensive & cumbersome.

Currently, the costs of key inputs for real estate development are up by minimum 7 %. This is over and above a rise of nearly 25 % past year. Labour cost is up 10 to 15 % & the costs of steel and cement by nearly 7 %. To add to this, funding costs have headed north. If we look at a city such as Mumbai, the recent DCR amendments would add to developers' costs by nearly 15 %, which includes the fungible premium payable if the builder opts to take the additional 35 % FSI (Floor Space Index) option.

Shobhit Agarwal, Jones Lang LaSalle India

 Cumulatively, this comes to an approximate hike of 20 % hike in construction cost, which most developers would pass on the consumers. The Indian real estate sector is in dire need of foreign funding - both in terms of maintaining growth & for the benefit of consumers.

FDI - The Only Feasible Option..!

Unlike most developed economies, India does not allow REITs (Real Estate Investment Trusts). Many would point to the M & A route, but this is also a lacklustre option as it comes at a cost of nearly 20 %.

Meanwhile, REMFs (Real Estate Mutual Funds) - India's tentative answer to the international REITs model, adapted to the existing Indian mutual funds platform - do not seem to be the right answer, either. While everybody is working on entry and creating assets, the important question of who will buy these assets to provide an exit to the developers / investors needs to be addressed.

The leveraging allowed in the case of Indian REITs is the lowest (at 20 % of the value) compared to 35 % in case of Malaysia, Hong Kong, Singapore, and Taiwan & 200 % in the case of Korea. This could result in a lower yield - and because it is not really leveraged, the risk factor is also higher.

With all these routes being plugged because of the risk involved, FDI is clearly the only life-saver which the real estate sector can look up to. However; the ever-changing policies on FDI, taxation & development, coupled with a lack in transparency in the system & a high amount of friction in approval mechanisms, have led to an uncertainty in yields & tenure of lock-in for investments in real estate.

 

Today, if a foreign investor is willing to invest for a medium term such 5 to 6 years, he is bound to be hesitant as it is most likely that the targeted projects would take longer than five years to be completed. Also, foreign investors are bound to miss out on the cream of returns, which come only after the project is in advanced stages of development or / nearing completion.

This uncertainty of the quantum & time of returns is the reason why most foreign investors are currently shying away from Indian real estate sector.

FDI Is Slowing Thanks to Low Yield And Long Gestation..!

Some international and domestic real estate funds are still focused on investments in residential projects in India. Luxury housing projects are out of the picture, as they are not large enough to meet minimum size for FDI requirements.

Today, a majority of real estate investments are targeted towards the mid-income housing segment with unit typically priced between Rs. 50 lakh to Rs.1.5 crore. Now, even affordable housing projects are failing to strike a chord with investors owing to the low yield & long gestation period involved.

(Source: Department of Industrial Policy and Promotion)

What Is Needed To Boost FDI in Indian Real Estate?

To enable the Indian real estate sector to meet its massive capital requirements and capitalize on the opportunities for large-scale real estate developments, the sector needs investor-friendly, streamlined policies from the Government.

The most important steps would be:

 ·   Allowing 100 % FDI in most real estate segments (with relaxation of certain parameters)

·    Introduction of a dedicated regulatory body

·    Ramping up the speed of the approval process.

These, coupled with increased transparency, adapting modern designs and technology for improved project execution & timely delivery from the industry are essential for attracting FDI back into Indian real estate.

About the author…

Mr. Shobhit Agarwal is Managing Director (Capital Markets) at Jones Lang LaSalle India

Shobhit Agarwal

Managing Director – Capital Markets

+91 22 6620 7575

shobhit.agarwal@ap.jll.com

For Media Contact

Mr. Arun Chitnis

Head – Corporate Communications & Media Relations

Jones Lang LaSalle India,

Level 6, Amar Avinash Corporate Plaza, Bund Garden Road,

Pune -  411 001. Telephone : 020 -  3093 0441 Fax: 020- 4019 6101

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Website: www.joneslanglasalle.co.in

Blog: www.joneslanglasalleblog.com/realestatecompass

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