Wednesday, November 25, 2009

Government may scrap 3-year lock-in for Foreign Direct Investment' in real estate

Doing away with this lock-in period has been a long-standing demand of Indian developers as well as foreign investors
To boost foreign direct investment (FDI) in real estate, the government may remove the mandatory three-year lock-in period for overseas investments in the sector.

The department of industrial policy and promotion (DIPP) has proposed this move, with a draft cabinet note on the proposal being circulated for inter-ministerial consultations. Doing away with this lock-in period has been a long-standing demand of Indian developers as well as foreign investors.

The government had permitted 100% FDI in the sector in 2005. However, this was subject to certain conditions such as a minimum capitalization of $5 million by the foreign investor and non-repatriation of the original investment for a minimum period of three years.

The liberalization of the real estate sector led to FDI inflows increasing from $151 million in 2005-06 to $2.03 billion in 2008-09. DIPP now argues that no sector, except defense, has a lock-in period. “Based on experience, this condition no longer seems necessary,” a DIPP official said on condition of anonymity.

Move to remove FDI lock-in in realty a positive: Experts

In an interview with CNBC-TV18, Suman Memani, Associate Vice President of Religare Capital Markets and Sanjay Dutt, CEO of Business at Jones Lang Lasalle Meghraj spoke about the possible relaxation of FDI norms in the real estate sector and the implications the move might have on the sector.

Q: It is good news for investors and for stocks. Would you say that immediately we are going to probably see real estate prices rising even further since the holding power of real estate companies could rise?

Dutt: There could be some movement on that. But clearly looking at from the project side, three years, most residential projects, for example if you really look at townships or indeed such large projects in Mumbai or Delhi, there the approval process, the construction process and a stage phased manner exit from that project, generally takes about 4-5 years.

So, will it really impact those projects? My answer is no. However, there would be some projects which under FDI norms- if you have a 50,000 sq meter built up and indeed the minimum level of investment where they may actually see that opportunity happening. But some of the investors who are not in good shape because of situations back home because of loss of appetite in the investors who want to exit may actually see a situation where they would exit today to align their business objectives.

But at the same time I will see this opportunity and regulatory change will bring other investors who instead of going into a Greenfield project, which are very time consuming and riskier would welcome a portfolio of assets from these investors because the comfort would be that the legal due diligence has already taken place. Everything has been sanitised and therefore it is an easier buy and less riskier proposition.

So I feel while there could be a short term hit, long term benefits will more than outdo the negative impact.
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1 comment:

  1. Real Estate is indeed one good investment. You can double your income as time goes by.