Change is good and the same could be said about the recent alterations made by the government of India on the FDI policy, regarding the real estate sector. As the real estate market in India has been facing losses in the past two to three years, the new FDI policy might turn out to be a boon for potential buyers and investors.
What are the Changes
The real estate sector in India has faced a huge slowdown in the recent years. This is why the government has decided to make some changes in foreign direct investment (FDI) norms in the infrastructure development sector. The two major conditions in respect to minimum floor area for a project, along with the capital requirement have been removed. Now the real estate developers are not required to restrict to the norm of a minimum built-up area of 20,000 sq. mtrs. and the minimum capital of 5 million dollars, which had to be normally shown within a time period of 6 months from the date of commencement of the project.
The government has made it easier for foreign investors to enter or exit the country before the completion of the project, provided a lock-in period of three years has been settled. However, the condition of a lock-in period will not be applicable for educational institutions, hospitals, hotels, special economic zones, and investments made by non-resident Indians.
Moreover, the government of India has also permitted 100% foreign direct investment in completed projects under the automatic route. For the purposes of the FDI Policy, each phase of the construction development project would be considered a different project.
Pros and Cons of the Changes
Though the changes made on the FDI are taken as radical, these changes are more related to the ease of doing business in the real estate sector. These new changes in FDI norms have simplified the complicated process of foreign investment. Thus, the removal of minimum limitations of capital investment and the built-up area will definitely encourage potential buyers to invest in small projects, as well. Projects of a smaller size in two-tier and three tier cities will certainly benefit from this.
In the real estate sector, the changes made by the government are well appreciated. But a few factors are impacting FDI flow into the industry. Among them is lack of clarity in the FDI policy, various failures in the policies proposed by the government, and the poor risk-reward equation. The time consuming and complicated process for approval is the reason behind the poor risk-reward equation.
Outside India, it takes around three to nine months to get a project approved. But in India, the time taken for to get a project approved may take as long as two to three years. This delay in the approval process for many projects is resulting in construction delays. This, in turn, results in huge cost overruns and also impacts the investor’s sentiments, as well. The need to speed up the approval process will attract the foreign and NRI investors in India.
The new changes in FDI’s policy in regards to real estate industry in India have given a sigh of relief to the people associated with the real estate sector.