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April 05, 2018

April 05, 2018 @ 06:03 PM

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Will easing out FDI rules in construction sector bringboom?

  Published : Monday, 15 December, 2014 12:19 AM
 
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Will easing out FDI rules in construction sector bringboom?
 
In a major boost to the real estate sector, the government has eased norms for FDI in construction development making the sector attractive for foreign investors. The move comes close on the heels of the government announcing a slew of economic reform measures in the last few months, including formalization of Real Estate Investment Trusts, Infrastructure Investment Trusts, and relaxed FDI norms for the railways sector. 
 
The real estate sector has been battling a slowdown and cash crunch, particularly for the last two years. The move to allow 100% FDI through automatic route will not only give a fresh impetus to the sector but will also have a ripple effect on the economy by way of infrastructure development and substantial job creation. Further, positive activity in this sector will trump up demand in a number of allied industries including those in the manufacturing sector such as cement and steel.
 
Under the new rules, the government has relaxed the minimum built-up area of the construction development project from the existing 50,000 square meters to 20,000 square meters for attracting FDI for both the domestic and foreign investors. The new norms also entail that the investee company will be required to bring minimum FDI of $5million within six months of commencement of the project. 
 
This minimum capitalization amount is now applicable to both wholly-owned subsidiaries and joint venture entities. Also, the unit size to be considered for affordable housing has been increased from 60 square meters (carpet area) to 140 square meters (floor area), on condition that at least 25% of the units under affordable housing should be of a floor area not exceeding 60 square meters.
 
Will Easing Out FDI Rules in Construction Sector Bringboom
 
On the issue of lock-in period for foreign investors, the new policy states that the investor will be permitted to exit on completion of the project or after three years from the date of final investment, subject to development of trunk infrastructure. The term trunk infrastructure includes roads, water supply, street lighting, drainage and sewerage. The new norms will override the earlier position according to which the original investment cannot be repatriated before a period of three years from completion of minimum capitalization. 
 
Will Easing Out FDI Rules in Construction Sector Bringboom
 
The elimination of the 3-year lock-in period is definitely the most notable modification to the FDI policy. The annual real estate private equity market inflows, which stands at USD 1 to 1.5 Billion per annum over the last few years, could double in the next two years due to this announcement. The previous three-year lock-in period clause deterred most investors. 
 
Another positive impact could be that there will be more pressure on developers to accelerate construction of projects being funded so that these funds can exit at a favorable time. That will help home buyers which otherwise often suffer protracted delays even from reputed real estate players in the delivery of inventory.
 
To promote affordable housing, the Government has announced certain relaxations in the policy. The conditions linked to minimum area, minimum capitalization and period of investment will not apply to the investee/joint venture companies which commit at least 30% of the total project cost for low cost affordable housing.
 
The move will help prevent the proliferation of slums in cities and encourage the cash-strapped sector to seek foreign investment in the affordable housing sector.Stay informed,
 
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