The Indian real estate sector is in the midst of major transformation: demonetisation, RERA, REIT, CLASS, affordable housing, and the GST will have a far reaching impact on the landscape of the sector in the coming years. Although the real estate sector in India is considered to be the most promising sector and has increased its contribution to the GDP over the years, it is still hugely plagued by market uncertainties. The real estate market continues to remain mostly unorganised, fairly fragmented, and characterised by small players with local presence. These uncertainties posed huge problems for the real estate companies to raise adequate funds.
Thus, the decision to liberalise FDI norms in the construction sector came as the most significant economic policy decision for the sector. Before this, only Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were permitted to invest in the housing and the real estate sectors. Foreign investors, other than NRIs, were allowed to invest only in development of integrated townships and settlements, either through a wholly owned subsidiary or through a joint venture company in India, along with a local partner. However, the new guidelines have further opened out FDI in townships, housing, built-up infrastructure and construction-development projects. Major corporations are taking the initiative and are wooing international players soliciting investments for major projects.
The government has provided relaxations in FDI-related norms for the construction development sector. These include: 100% FDI is permitted in the construction development sector (which includes development of townships, construction of residential/commercial premises, roads and bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional-level infrastructure and townships) and industrial parks. The minimum area restriction and capitalisation requirements have been removed. 100% FDI permitted is in three categories of stabilised assets, namely, townships, business centres and malls/shopping complexes.
The policy change had its impact on flow of foreign funds to the sector. India was ranked fourth in developing Asia for FDI inflows, as per the World Investment Report 2016 by the United Nations Conference for Trade and Development. The real estate industry also saw a visible return of equity investment into India, last year. Indian real estate has attracted around $32 billion in private equity so far. The global capital flow into Indian real estate in 2016 stood at approximately $ 5.7 billion.
The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received FDI equity inflows to the tune of USD24.29 billion in the period April 2000-March 2017. This accounted for about 7.5% of the total FDI came to India during this period.
Now that the Securities and Exchange Board of India (SEBI) has given its approval for the Real Estate Investment Trust (REIT) platform, it will help in allowing all kinds of investors to invest in the Indian real estate market. It would create an opportunity worth an estimated Rs.1.25 trillion in the Indian market over the years. Responding to an increasingly well-informed consumer base and, bearing in mind the aspect of globalisation, Indian real estate developers have shifted gears and accepted fresh challenges. The most marked change has been the shift from family owned businesses to that of professionally managed ones.
The growing flow of FDI into Indian real estate is encouraging increased transparency. Developers, in order to attract funding, have revamped their accounting and management systems to meet due diligence standards.