Investing in Indian Real Estate

ndian Real Estate: “Undeniably tremendous!”

And, that is the undeniable verdict of a Price Waterhouse Coopers study conducted on the investment environment in terms of Indian real estate. Ever since the Government of India gave its stamp of approval to 100% foreign direct investment (FDI) in housing and real estate, NRIs, overseas real estate developers, hoteliers, and others have been tracking a path to the sub-continent. Sensing the business potential for developing serviced plots, constructing residential / commercial complexes, business centres / offices, mini-townships, investments in infrastructure facilities e.g. roads, bridges, manufacture of building materials, etc., FDI is flooding in to take advantage of the tremendous real estate opportunities.

The increasing demand for Indian real estate has not only generated employment, it has also been instrumental in the growth of steel, cement, bricks and other related industries. Estimated to be in the region of US $12-billion, real estate development in India is growing by as much as 30% each year. Already, eighty percent of Indian real estate has been developed for residential space, and 20% comprises of shopping malls, office space, hospitals and hotels. Fuelled largely due to off-shoring / outsourcing of BPOs, call centres, high-end technology consulting and software development and programming firms, real estate growth in India has great investment prospectives.

Indian Real Estate: Investment Opportunities

Tax reform measures in the last few years have ensured real estate in India is one of the most productive investment sectors, with money invested in real estate offering regular returns on investment including appreciating in value. And, the Government of India by opening up 100% foreign direct investment, and fiscal reforms like stamp duty and property tax reductions, setting up real estate mutual funds has turned real estate into a promising investment option.

Already, it has approved the first Rs. 100-crore FDI project in Gurgaon. With urban populations expected to grow from 290-million to 600-million by 2021, housing requirements are expected to top 68-million by 2021, which means India’s urban housing sector could do with an investment of US $25-billion over a 5-year period. Poised for rapid urbanisation, 3 out of 10 of the world’s largest cities are in India. An influx of jobs due to off-shoring / outsourcing has resulted in rising disposable incomes, increased consumerism, factors responsible for changing the face of residential and commercial real estate in India.

Wishing to take advantage of real estate investment opportunities, banks and housing finance companies are falling over themselves to tie-up with developers or offer project loans at competitive rates.

Indian Real Estate: Foreign Direct Investment (FDI)

Recent government policies have seen to it that inbound FDI for housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure, no longer requires prior government approval, with the exception of the Reserve Bank of India (RBI). It is important that all inward remittances or issues of shares to NRIs are reported to RBI within 30-days, and all FDI in the above areas is subject to the following conditions:

Minimum area for development under each project is as under: Serviced housing plots, minimum requirement of 10 hectares. Construction-development projects, minimum built-up area requirement of 50,000 sq. metres. Combination project, either of the above two conditions suffices. Investment is further subject to the following conditions: Minimum capital investment = US$10 million for a wholly owned subsidiary, and US$5 million for joint ventures with Indian partners. Further, the funds have to be brought in within six months of commencing business.

It is not permissible to repatriate original investment before a period of three years from the date of minimum capital investment. However, if the investor gets prior approval from the Government through FIPB, early exit is permitted.

Fifty percent of the project is to be completed within 5-years from the date of obtaining all legal clearances. No undeveloped plots can be sold where roads, street lighting, water supply, drainage, sewerage and other conveniences are not available. Serviced housing plots can only be sold if the investor has provided infrastructure and obtained a completion certificate from the concerned local body / service agency.

Development has to be in accordance with town master plans, planning norms, standards, and local bye-laws.

The investor is responsible for obtaining all necessary approvals, including building / layout plans, internal / external / peripheral area development, infrastructure facilities, payment for development and other charges. All development has to be in compliance with State Government / Municipal / Local Body requirements that are prescribed under applicable rules / bye-laws / regulations. Further, Non Resident Indians (NRIs) are allowed investment under the Automatic Route of FDI in the following Housing and Real Estate Sector:

Services plot development and construction of built-up residential premises.

Real estate investment covering construction of residential / commercial premises including business centres, offices, etc. Development of townships.

City / regional level urban infrastructure facilities, including roads and bridges.

Investment in manufacture of building materials. Investment in participatory ventures in (i) to (v) above

Investment in housing finance institutions.

Permissible FDI private / joint / state investment in construction in the export processing zones (EPZS) / special economic zones (SEZS) is as follows:

100% FDI real estate investment within Special Economic Zone (SEZ). 100% FDI for developing a township within the SEZ i.e. residential areas, markets, playgrounds, clubs, recreation centres etc.

Standard Design Factory (SDF) building development in existing Special Economic Zones. SEZ land may be leased or sub-leased to developers as per relevant guidelines for this purpose.

Full freedom to allocate developed plots to approved SEZ units on commercial basis including competent authorities for provision of water, electricity, security, restaurants, recreation centres etc. along commercial lines.

As you read this, a wide spectrum of changes are and have taken place in Indian real estate. Various proposed reforms e.g. removal of tenancy laws, computerization of land records, correction in taxation structure etc., are ensuring India emerges as a favoured and profitable destination for real estate developers / investors, both domestic and international.

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