Deepak Talwar: Foreign Direct Investment In Real Estate
“Over the last sixteen years, the government has made significant progress in liberalising FDI in real estate, and the time has come to take it a step further,” says the market analyst and lobbyist, Deepak Talwar.
Historically, real estate has been one of the most carefully guarded sectors, bolstered by stringent regulations and policies that severely restricted foreign investment. This safeguard was intended to prevent speculation in the sector, and speculative real estate transactions are still prohibited under the foreign direct investment regime. Fortunately, the government has strategically relaxed Foreign Direct Investment (FDI) norms over the last decade and a half, gradually allowing for more investment and growth.
It was a pioneering Press Note issued in 2005 (PN.2/2005) that opened up previously closed doors to FDI, subject to certain conditions. A distinction was made between real estate and construction development, kicking off the liberalisation of this sector. Under PN.2/2005, under certain conditions, 100 percent FDI under the automatic route was permitted in townships, housing, built-up infrastructure, and construction development projects (which would include, but not be limited to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure). Needless to say, this decision opened a large and transformative door into real estate investment.
There were obligations on the minimum size of the development, the time frame for capitalisation, and certain lock-in requirements, all of which have since been relaxed. Deepak Talwar, the seasoned market analyst and lobbyist says, “The following points should be kept in mind during the current regime. Transferring a stake from one non-resident to another without repatriating the investment is not subject to any lock-in period or government approval. This is due to the fact that there will be no FDI outflow; the Indian investee company will only be permitted to sell developed plots. According to the policy, developed plots are those in which all trunk infrastructure has been installed. In general, the sale of undeveloped land remains prohibited; however, 100% FDI is now permitted under the automatic route in completed projects for the operation of townships, malls/shopping complexes, and business centres.”
Despite the sector’s transformation over the last decade and a half, there are still areas where the law is unclear. Completed assets represent an area of untapped FDI potential, and policy convergence is required to capitalise on this opportunity. “The existing policy is generally interpreted conservatively, with the view that in the construction development sector, unless the FDI came in while the real estate asset was being developed, it is not permitted to be infused into a company with completed assets. Townships, malls/shopping complexes, and business centres are currently exceptions, all of which are open to 100% FDI with conditions,” informs Deepak Talwar, the seasoned market analyst and lobbyist.
Besides, foreign investment in industrial parks and infrastructure is permitted, however, in most cases, the projects qualify as construction development projects. Recent amendments by way of press note 1 of 2022 clarify that earning rental income from real estate assets will not be treated as real estate business, but it remains unclear whether foreign investors can invest in companies holding completed assets that do not fall within the policy’s stated exceptions in the construction development sector.
Furthermore, the term business centre is defined as a project where a variety of businesses of the same or different nature are carried out from a specific building – a definition that leaves far too much room for interpretation and thus confusion. The current policy allows foreign investments in completed assets as long as the intent is only to earn rental income and not to transfer ownership.
Deepak Talwar notes, “Although this is a positive step, it appears to contradict the law’s intent to limit foreign investment in completed assets, and is thus interpreted to mean that if an entity receives foreign investment to develop a project, the entity can then lease out all or part of the project without being considered to be in the real estate business. The opportunities for capitalisation would be limitless if the government made their position clear.”
Over the last few years, there have been discussions about further liberalising FDI policy in the real estate sector, possibly in an attempt to alleviate the havoc wreaked by the pandemic on the real estate market. A restructure of FDI policy appears to be in the works, with the DPIIT expected to present these changes soon. “It is suggested that relaxation will include 100% FDI in completed RERA registered projects with more than 100 apartments, as well as other, hopefully progressive, changes,” says Deepak Talwar, the seasoned market analyst and lobbyist.
This move would allow builders to fully exit developed assets and begin work on new projects with enough cash on hand to meet the needs of their buyers. They would also be able to complete pending projects that had been stalled due to a lack of funds, as well as monetise previously unsold inventory. The liquidation of their current holdings would allow cash to recirculate, thereby reviving the market. Essentially, the respite of new investment could be the key to surmounting the financial obstacles posed by the pandemic.
Many foreign investors are interested in forwarding purchase contracts, which require the investor to acquire the asset once it is completed and possibly even rent it out to tenants. Giving investors what they want will only attract more of them, and the value of their investments will provide a much-needed boost to the economy. The government should capitalise on rising international investor demand and focus on attracting more FDI. In addition to the overall economic boost, the supply of affordable housing (a key focus for the government in the previous two budgets) will increase to meet demand.