The Effect of Foreign Direct Investment on Real Estate

Posted on: Augut 25, 2022
Star EstateThe Effect of Foreign Direct Investment on Real Estate

Over the last fifteen or sixteen years, the government has made significant progress in liberalising FDI in real estate, and the time has come to take this a step further.

Currently, under the automatic route, 100% FDI is permitted in completed projects for the operation of townships, malls/shopping complexes, and business centres.

Real estate in India is the second biggest job creator, accounting for 13% of the country's GDP, and the third largest FDI recipient. It is expected to surpass Rs 65,000 crore by 2024 and 2025. The real estate industry is continually developing, with new solutions encompassing residential, commercial, and retail developments in major metropolitan areas and across the nation, including tier 2 communities. Bengaluru is likely to be the most popular property investment location for NRIs, according to an IBEF survey, followed by Ahmedabad, Pune, Chennai, Goa, Delhi, and Dehradun.

However, real estate has been one of the most jealously guarded businesses in order to deter speculation. Speculative real estate business is still prohibited under the FDI policy. However, during the last decade and a half, the government has steadily relaxed Foreign Direct Investment (FDI) laws, allowing for greater investment and economic growth. Currently, under the automatic route, 100% FDI is permitted in completed projects for the operation of townships, malls/shopping complexes, and business centres. However, there is still room for easing restrictions on FDI in the industry in order to alleviate the real estate market instability produced by the epidemic.

RERA and its Implications

The states' watering down of the 2016 Real Estate (Regulation & Development) Act (RERA), which enabled certain developers to skirt the laws, was a major source of worry for the sector. This compelled prospective homeowners to do even more thorough due diligence on under-construction properties. The apex group representing homemakers, the FPCE, petitioned the Supreme Court against the states' watering down of the standards, claiming that it is harmful to consumers. The Supreme Court concurred and directed the Centre to explore whether the guidelines established by different states under the Real Estate (Regulation and Development) Act, 2016 (RERA) are consistent with central law and serve the interests of homebuyers.

This would guarantee consistency in builder-buyer agreements across state RERA standards. It will also foster confidence between homebuyers and builders by establishing responsibility and openness. The Indian government has suggested allowing 100 per cent FDI in finished RERA-registered projects with more than a hundred apartments. Only if the regulations are followed in word and spirit can the full advantages of RERA be realised.

Under RERA, builders may completely sell established assets and begin building on new projects with enough finances to satisfy the expectations of their purchasers. The sale of their present assets would allow for capital recycling, which would revitalise the market. The government should take advantage of expanding worldwide investor demand by focusing on recruiting more foreign direct investment.

Moving away from corporatisation

Foreign direct investment in real estate would benefit all stakeholders. The Real Estate Investment Trust (REIT) platform has been approved by the Securities and Exchange Board of India (SEBI), allowing all types of investors to engage in the Indian real estate market. In the following years, it will generate an opportunity worth Rs. 1.25 trillion (US$ 19.65 billion). A higher FDI ceiling would attract cheaper financing and more capital from outside, ensuring that projects are finished on schedule. It will also boost the Indian currency and keep inflation under control. The most noticeable transition has been from family-owned enterprises to professionally managed developers. To meet the rising need for managing numerous projects across cities, real estate developers are engaging skilled individuals in sectors such as project management, architecture, and engineering. They are also investing in centralised methods for sourcing commodities and labour organisations. As a result, labour will gain from greater salaries and other advantages a result of MNC enterprises.

Access to more inexpensive and high-quality housing

People in the middle and lower middle classes would be able to buy their dream houses. The reduced built-up area would aid in attracting foreign investments, resulting in more affordable and higher-quality dwellings. The residential sector is likely to increase dramatically, with the Central Government seeking to construct 20 million affordable dwellings in metropolitan areas throughout the nation by 2022 under the Union Ministry of Housing and Urban Affairs' ambitious Pradhan Mantri Awas Yojana (PMAY) programme. In order to accommodate the country's growing urban population, an extra 25 million units of affordable housing are needed by 2030.

FDI liberalisation

Over the last sixteen years, the government has made significant progress in liberalising FDI in real estate, and the time has come to take this a step further. All stakeholders would benefit from reducing and consolidating regulatory requirements for finished assets, and time is of importance. Rapid adoption will hasten the advantages not just in the real estate industry but also in other associated businesses. Regulatory clarity and constant attempts to make the sector more conducive to investment would raise the Indian real estate market and offer up limitless prospects. It is expected that Indian real estate will attract significant FDI over the next two years, with an US$ 8 billion capital infusion by FY22.