Column: India is now open to real estate investors
(DH 14/04/2006) New Delhi - The real estate market in India is on a high growth curve. A booming economy and favourable demographics have provided the necessary impetus for sustained growth. Further, recent policy measures have opened up foreign investment in the real estate sector, which for a long time lacked institutional funding support. This is part one of the two-part PWC report.
With the liberalisation of the economy and the consequent increase in business opportunities, India’s real estate sector has assumed growing importance. Indian real estate has huge potential demand in almost every sector, but especially commercial, residential, retail, industrial, hospitality, healthcare etc.
The demand for commercial and housing space, in particular rental housing, has grown tremendously since 2002.
Property development has surged in India since 2002, helped by an annual doubling in demand for office space as foreign firms invested into the country’s information technology (IT) sector and call-centres in Mumbai, the National Capital Region (Delhi and satellite towns), Bangalore and Hyderabad.
Land prices have increased rapidly in these markets — the extent of the rise, however, varies from city to city and even within cities. Gurgaon, a satellite city of Delhi for instance, has registered a 40 to 50 per cent increase in property prices over the past 18 months. According to estimates, demand from the IT/ITES (IT enabled services) sector alone is expected to be 14 million sq m. (150 million sqft) of space across the major cities by 2010.
According to the 2001 Census, 27.8 per cent of India’s over one billion population lives in cities. According to the Vision 2020 document released by India’s planning commission, the country’s urban population is expected to rise from 28 per cent to 40 per cent of the total population by 2020. Future growth is likely to be concentrated in and around 60 to 70 large cities with a population of one million or more.
The Indian cities of Mumbai, Bangalore and New Delhi have emerged as the top three investors’ choices for real estate investment in 2005, according to Jones Lang LaSalle’s annual Investor Sentiment Survey - Asia. The survey also noted that investment interest in the region would continue to be robust this year with more confidence towards the retail and office property markets across the region. This can be attributed to India’s strong economic performance and its established position as an offshoring destination for many multinational corporations, which has translated into a more robust real estate market environment.
Regulations
Until February 2005, the real estate sector in India was tightly regulated. Foreign Direct Investment (FDI) was allowed in only four sectors: development of integrated townships, technology parks, industrial parks and special economic zones. FDI in these permitted real estate sectors also had high threshold requirements.
For example, to develop integrated townships, investors had to develop a minimum of 100 contiguous acres with a minimum of 2,000 dwelling units.
This deterred foreign investment in real estate development and foreign investment in the sector remained minimal.
Traditionally, Non Resident Indians (NRIs) have been allowed to invest in the following real estate activities:
In March 2005, the Indian government announced liberalised guidelines allowing FDI up to 100 per cent in townships, housing, built-up infrastructure and construction-development projects (including but not restricted to – housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure).
As per the guidelines, for the automatic route to apply, the following conditions would have to be complied with:
Minimum area
Investment
Minimum capitalisation of :
Others
The intention of the government by way of this liberalisation was to clear the path for foreign investment into development of the commercial and housing sectors so as to meet the demand. NRI investments continue to enjoy special dispensation from the above prescribed conditions.
Although the government has not undertaken capital market level deregulation measures, such as allowing REITs (whether domestic or foreign owned) to operate in India, in 2004 it did allow international and domestic companies to operate real estate funds/pooled vehicles through the private equity fund route. This, combined with the boom in the real estate market in India has opened the doors for a host of realty funds.
While most funds were initially floated by financial institutions/banks such as HDFC, ICICI Bank and Kotak Mahindra Bank, real estate developers like DLF Universal and even retailers like Pantaloon have now entered the arena for creating more retail facilities. Most of the funds floated in the recent past have received a strong response from investors. Reports suggest that over the past six months, about US$ 500 million has already/flowed into the real estate sector.
Over the next 18-30 months, the flow may rise to a massive $ seven to eight billion. These real estate funds have been established as venture capital funds (VCFs) with specific approval from the Securities Exchange Board of India (SEBI). VCFs are allowed to invest in domestic companies whose shares are not listed on a recognised stock exchange in India and are engaged in businesses as permitted under SEBI guidelines require a minimum investment of INR 500,000 (approximately. US$ 110,000) per investor subject to a commitment of INR 50 million (approximately US$ 1.11 million) from all investors before the start of operations by the VCF. The VCF cannot invest more than 25 per cent of its corpus in one undertaking, at least two thirds of investible funds of the VCF have to be invested in unlisted equity shares/equity linked instruments and not more than one third of the investible funds can be invested in debt.
Opportunities
All real estate sectors, residential, commercial and retail are currently witnessing huge growth in demand. New customer segments are emerging. The residential market is not only witnessing huge growth, thanks to easy availability of finance, but also the average age for ownership of new homes is declining drastically. Younger customers and nuclear families are creating fundamentally different customer segments.
Similarly, in the retail segment, as the market grows exponentially, newer and larger formats along with the likely entry of global retail giants in the Indian market (subject to impending government policy revisions with respect to FDI in retailing) will necessitate greater variety and maturity in the retail real estate market. Mall developers are already adapting to local cultures and traditional preferences. Some new genres of malls are the automobile mall, the Gold Souk and the wedding mall, which are one-stop shopping destinations for what their name describes.
By Vivek Mehra, Executive Director, and Akash Gupt, Senior Manager, PricewaterhouseCoopers, New Delhi
With the liberalisation of the economy and the consequent increase in business opportunities, India’s real estate sector has assumed growing importance. Indian real estate has huge potential demand in almost every sector, but especially commercial, residential, retail, industrial, hospitality, healthcare etc.
The demand for commercial and housing space, in particular rental housing, has grown tremendously since 2002.
Property development has surged in India since 2002, helped by an annual doubling in demand for office space as foreign firms invested into the country’s information technology (IT) sector and call-centres in Mumbai, the National Capital Region (Delhi and satellite towns), Bangalore and Hyderabad.
Land prices have increased rapidly in these markets — the extent of the rise, however, varies from city to city and even within cities. Gurgaon, a satellite city of Delhi for instance, has registered a 40 to 50 per cent increase in property prices over the past 18 months. According to estimates, demand from the IT/ITES (IT enabled services) sector alone is expected to be 14 million sq m. (150 million sqft) of space across the major cities by 2010.
According to the 2001 Census, 27.8 per cent of India’s over one billion population lives in cities. According to the Vision 2020 document released by India’s planning commission, the country’s urban population is expected to rise from 28 per cent to 40 per cent of the total population by 2020. Future growth is likely to be concentrated in and around 60 to 70 large cities with a population of one million or more.
The Indian cities of Mumbai, Bangalore and New Delhi have emerged as the top three investors’ choices for real estate investment in 2005, according to Jones Lang LaSalle’s annual Investor Sentiment Survey - Asia. The survey also noted that investment interest in the region would continue to be robust this year with more confidence towards the retail and office property markets across the region. This can be attributed to India’s strong economic performance and its established position as an offshoring destination for many multinational corporations, which has translated into a more robust real estate market environment.
Regulations
Until February 2005, the real estate sector in India was tightly regulated. Foreign Direct Investment (FDI) was allowed in only four sectors: development of integrated townships, technology parks, industrial parks and special economic zones. FDI in these permitted real estate sectors also had high threshold requirements.
For example, to develop integrated townships, investors had to develop a minimum of 100 contiguous acres with a minimum of 2,000 dwelling units.
This deterred foreign investment in real estate development and foreign investment in the sector remained minimal.
Traditionally, Non Resident Indians (NRIs) have been allowed to invest in the following real estate activities:
- Development of serviced plots and construction of residential premises
- Construction of commercial premises including business centres and offices
- Development of townships
- City and regional level urban infrastructure facilities, including both roads and bridges
In March 2005, the Indian government announced liberalised guidelines allowing FDI up to 100 per cent in townships, housing, built-up infrastructure and construction-development projects (including but not restricted to – housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure).
As per the guidelines, for the automatic route to apply, the following conditions would have to be complied with:
Minimum area
- In case of development of serviced housing plots, 10 hectares (25 acres)
- In case of construction-development projects, built-up area of 50,000 sq m.
- In case of a combination project, any of the above two conditions
Investment
Minimum capitalisation of :
- US$ 10 million for wholly owned subsidiaries
- US$ 5 million for JV with Indian partners – brought in within 6 months of commencement of business
- Original investment cannot be repatriated before a period of three years from completion of capitalisation.
- The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB).
Others
- At least 50 per cent of the project to be developed within five years from the date of obtaining all statutory clearances.
- Investor not permitted to sell undeveloped plots (where roads, water supply, street lighting, drainage, sewerage and other conveniences are not available).
The intention of the government by way of this liberalisation was to clear the path for foreign investment into development of the commercial and housing sectors so as to meet the demand. NRI investments continue to enjoy special dispensation from the above prescribed conditions.
Although the government has not undertaken capital market level deregulation measures, such as allowing REITs (whether domestic or foreign owned) to operate in India, in 2004 it did allow international and domestic companies to operate real estate funds/pooled vehicles through the private equity fund route. This, combined with the boom in the real estate market in India has opened the doors for a host of realty funds.
While most funds were initially floated by financial institutions/banks such as HDFC, ICICI Bank and Kotak Mahindra Bank, real estate developers like DLF Universal and even retailers like Pantaloon have now entered the arena for creating more retail facilities. Most of the funds floated in the recent past have received a strong response from investors. Reports suggest that over the past six months, about US$ 500 million has already/flowed into the real estate sector.
Over the next 18-30 months, the flow may rise to a massive $ seven to eight billion. These real estate funds have been established as venture capital funds (VCFs) with specific approval from the Securities Exchange Board of India (SEBI). VCFs are allowed to invest in domestic companies whose shares are not listed on a recognised stock exchange in India and are engaged in businesses as permitted under SEBI guidelines require a minimum investment of INR 500,000 (approximately. US$ 110,000) per investor subject to a commitment of INR 50 million (approximately US$ 1.11 million) from all investors before the start of operations by the VCF. The VCF cannot invest more than 25 per cent of its corpus in one undertaking, at least two thirds of investible funds of the VCF have to be invested in unlisted equity shares/equity linked instruments and not more than one third of the investible funds can be invested in debt.
Opportunities
All real estate sectors, residential, commercial and retail are currently witnessing huge growth in demand. New customer segments are emerging. The residential market is not only witnessing huge growth, thanks to easy availability of finance, but also the average age for ownership of new homes is declining drastically. Younger customers and nuclear families are creating fundamentally different customer segments.
Similarly, in the retail segment, as the market grows exponentially, newer and larger formats along with the likely entry of global retail giants in the Indian market (subject to impending government policy revisions with respect to FDI in retailing) will necessitate greater variety and maturity in the retail real estate market. Mall developers are already adapting to local cultures and traditional preferences. Some new genres of malls are the automobile mall, the Gold Souk and the wedding mall, which are one-stop shopping destinations for what their name describes.
By Vivek Mehra, Executive Director, and Akash Gupt, Senior Manager, PricewaterhouseCoopers, New Delhi
posted by InCar Group Press Room at 12:13
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