Revised FDI Norms May Double Private Equity Inflow in Realty Sector

The government's announcement of easier FDI norms for the construction sector has generated a lot of excitement among the country's real estate players - and justifiably so. The fact that 100% FDI will now be allowed under automatic route to invest in completed assets, along with relaxation of other norms, is expected to increase FDI inflows significantly.

The modification of the three-year lock-in period basically opens the portals wide for FDI funds who were deterred by this clause so far. It also means that there will be more pressure on developers to accelerate construction of projects being funded so that these funds can exit at a favourable time.

The annual real estate private equity market inflows, which stands at USD 1-1.5 Billion per annum over the last few years, could double in the next two years due to this announcement.

Investors will now be permitted to exit either on completion of the project, or after the completion of support infrastructure in the project such as internal and approach roads, water supply, street lights, sewerage etc. This new exit feature correctly assumes that the successful deployment of such infrastructure is a major landmark point in a project's life cycle, post which all other development will happen assuredly and according to stipulated timelines.

With the news that 100% FDI is now allowed under automatic route in completed project for operation and management of not only townships but also shopping complexes and business centres, developers will be able to sell completed malls and integrated townships to foreign investors. This will significantly increase the volume of the retail real estate business. Also, with a lot more projects qualifying under FDI funding, the refinancing business will see significant increase.

The unit size to be considered for affordable housing has been increased from 60 square meters (carpet area) to 140 square meters (floor area), on condition that at least 25% of the units under affordable housing should be of a floor area not exceeding 60 square meters.

With the minimum floor area requirement for FDI having been lowered from 50,000 sqm to 20,000 sqm, smaller projects will now qualify for FDI. Developers will be exempt from restrictions in area and minimum capitalization if they commit 30% of the project cost to affordable housing, which will increase the supply of budget housing across India.