Opportunities For Foreign Investors in Indian Realty Sector
With relaxed FDI guidelines, real estate focused government initiatives and growing market, the Indian real estate holds a vast opportunity for investors seeking to invest in Indian real estate, says Cushman & Wakefield India survey.
The Indian economy is expected to record GDP growth higher than China, making it the fastest in the world during FY 2015-16.
The positive economic outlook, progressive trade and industry policies and government initiatives have attracted significant investments in India during the last couple of years.
The total foreign direct investments during FY 2014-15 recorded 23% growth to USD 44 billion, whereas the first half of FY 2015-16 has already witnessed FDI flows of USD 24.4 billion into India.
In particular, the commercial real estate segment gained significant momentum in 2015 and is set on the growth path whereas the residential segment witnessed significant rise in Private Equity in Real Estate (PERE) investments owing to high yield structured debt (SD) investment strategies that offers stable and secured returns at pre-decided terms.
Private Equity Real Estate (PERE): On the back of improving economic conditions, the PERE investments have grown at over 30% compound annual growth rate (CAGR) since 2010.
The period between 2010 and 2015 received USD 10.8 billion in PERE investment, of which 60% (USD 6.5 billion) of the investments were made during the last two years. The total PERE investments made during 2015 alone stood at USD 3.96 billion. The total structured debt investments grew by 111% in terms of value to USD 1.96 billion (49% share) in 2015 as compared to USD 0.9 billion (37% share) recorded in the previous year. While the number of PERE deals grew by about 23% y-o-y, the share of structured debt deals increased to 72% of the total deals during the year. However, due to rise in competition from investors and improved economic scenario, coupon rates for structured debt have reduced to an average of 15% - 17%.
Within the top eight cities in India, the three major cities i.e. Mumbai, Bengaluru and Delhi NCR account for about 65% of Grade A office stock. The three cities together accounted for over 85% (USD 3.7 billion) of the cumulative structured debt investments made between 2010 and 2015. Mumbai continued to receive the highest PE investments and accounted for over 32% of the structured debt investments.
Structured debt deals in the residential segment witnessed a remarkable growth of over 86% in 2015. At the end of 2015, the residential segment accounted for over 82% of the total structured debt investments followed by office at 13%.
Leveraging from the benefits of structured debt such as secured and stable returns coupled with relaxation in FDI norms in real estate sector, these investments are likely to increase in non-residential segments over the next few years.
The domestic funds in 2015 were significantly more active and doubled their structured debt investments to USD 3.2 billion for the period 2010-15, up from USD 1.6 billion during 2010-14. However, foreign funds have also increased their investments by 47% to USD 1.2 billion during the same period, indicating rising investor confidence in the Indian realty market
The key amendments to the FDI regime are -
• 100% FDI under the automatic route is permitted in construction led development projects including townships, construction on residential and commercial premises, roads & bridges, resorts,Hotels, hospitals, educational institutes, recreational facilities, city and regional level infrastructure.
• The condition for minimum floor area of 0.22 million sq. ft. in construction development projects and minimum capitalization of USD 5 million to be brought in within the period of six months of the commencement of business have been removed.
• The investment will have a lock-in period of three years for each tranche of investment, however investors are permitted to exit at any time upon completion of the project or after development of trunk infrastructure i.e. roads, sewage, drainage, water supply and street lighting.
• The lock-in-period condition is not applicable on special economic zones,Hotels and tourist resorts, hospitals, educational institutions, old age homes and investment by Non-Resident Indians (NRIs).
• The transfer of stake between non-resident investors is permitted without repatriation of investment. The transfer of stake will not be subject to any lock-in period and will not require government approval.
• The government also clarified that the FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights (TDRs).