Published: November 1, 2014 3:35:38 am
The government’s decision to relax FDI norms in the construction sector comes at a time when cash-strapped realtors and construction companies were struggling for want of fund raising avenues. The move is likely to give a fillip to smaller projects in the large metros.
According to the new guidelines, the minimum floor area specification for FDI inflows has been reduced to 20,000 square metres as opposed to 50,000 square metres and the minimum capital requirement for investment has been brought down to $5 million from $10 million. The government has also permitted repatriation of FDI or transfer of stake by one non-resident investor to another, before the completion of the project.
Industry experts claim that the eased reforms are likely to benefit smaller projects in tier-2 or tier-3 cities, with the bigger projects and firms possibly not benefitting commensurately. Smaller projects in fringe towns continue to remain untapped markets for FDI. Neeraj Bansal, head, real estate and construction sector, KPMG, said that the focus of the reforms is the smaller size projects in the metro cities, and that the $5 million reduction in minimum investment requirement not likely to be a major benefit for larger construction firms.
Bansal said that in the long run, an overall infusion of liquidity in the sector is likely to benefit it as a whole.
“The reforms would now allow foreign investors to invest in smaller projects spread over land parcels of about 3-4 acres. Additionally, the removal of the restriction on investment in affordable housing projects, which is expected to usher development of affordable housing and slum-rehabilitation projects. In near term, we expect the policy to support housing and commercial office projects in metro cities such as Delhi and Mumbai, where project size is generally small, yet requires heavy investment, due to expensive land parcels and high construction cost,” he said.
While smaller construction firms are predicting tougher competition, the larger companies are unfazed.
Apart from the easing on investment and built-up area, the government has also eased the exit policy for the investors, allowing them to leave on completion of the project or after three years from the date of final investment, subject to development of trunk infrastructure.
Bansal says that the foreign construction firms who have already invested in the country are likely to be focusing at this point on the relaxed exit policy norms, which were not very clear before, and reevaluating their current investments in the country.
The reforms, however, have come at a time when the investor sentiment in the sector has dropped due to clarity in regulations and as a result, the sector has witnessed severe cash crunch and stress.
Rohit Raj Modi, Secretary CREDAI-NCR, said, “The foreign investment in real estate has also gone down in last few years. Investors were shying away due to ambiguity in rules and regulations. Also they were not keen on locking their funds for longer period. With these reforms in place, they would now be able to manage their fund quite well. We believe affordable housing would be the biggest beneficiary of this step as funding is now allowed in projects sizing 20,000 sq meters as well,” he said.
In light of the new norms, if a small developer wants to bring up a project that is located in these areas, he will not likely be held back due to lack of cash. Also, if the project has been classified as an affordable housing project, there is no restriction on FDI whatsoever, which is a great boost in itself.
According to Sanjay Sharma, managing director, Qubrex Real Estate Consultancy, the lack of transparency in the real estate sector and the low success rate of the the projects will possibly turn investors from abroad away from investing into larger projects coming up in metros.
“The biggest problem that plagues construction firms is that they are not paid on time by builders. So the projects are stuck. When they look into the real estate sector in India, they will see that it is not as efficient as they would like it to be, with so many large projects stuck and builders not being exactly transparent. Why will they put their money in these?” Sharma said.
He added, however, that in smaller cities or in the fringes of the larger towns, where smaller construction firms and developers are active, the problem is not as severe, which is why it is likely that FDI will find its way there.
The share prices of real estate firms shot up after the announcement, with Unitech’s share price witnessing a growth of 14.8 per cent and closing at Rs 20.45 by Friday evening. DLF saw a growth of around 5.3 per cent and closed at Rs 124.5 while HDIL rose 8.46 per cent and closed at Rs 83.25.
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