Francisco A. Laguna & Annapurna Nandyal
Returns on investments in real estate in India have been impressive: 30 – 40% over the past several years; and expected future returns run between 12 – 20%. Over the past 7 years, ~ US$ 18 billion has been invested in the sector. Commercial and residential projects, including planned communities with schools, hospitals, recreation and retail spaces, are being built in the areas surrounding all major Indian cities as businesses expand and people search for better quality of living in less congested and newly constructed areas.
Prior to 2005, foreign investors were only allowed to invest in the development of hotels, industrial parks, Special Economic Zones (SEZs) and integrated townships, either through wholly-owned subsidiaries or joint ventures. In 2005, the Government allowed 100% FDI under the “automatic route” in townships, housing, built-up infrastructure and construction of development projects (e.g. commercial premises, educational institutions, recreational facilities, city and regional level infrastructure etc.), hotels, tourism and resorts. Consequently, foreign investors can now invest without seeking the prior permission of the Government of India, the Reserve Bank of India (RBI), the Foreign Investment Promotion Board (FIPB) or the Ministry of Finance, as applicable. FDI is not allowed in the real estate sales or brokerage sector (buying or selling of real estate or trading in Transferable Development Rights).
Many foreign real estate investment companies have come to India, including private equity funds, pension funds and development companies which were lured by big returns on investment. Companies such as CESMA International Pvt Ltd, Emmar Properties of Dubai and Donald Trump Organization have joined with local real estate developers to construct projects in India.
The Department of Industrial Policy and Promotion (DIPP) has established the following norms for foreign investment to in real estate.
- In case of development of serviced housing plots, a minimum land area of 10 hectares
- In case of construction-development projects, a minimum built-up area of 50,000 sq.mts
- In case of combination project, either of the above two conditions would suffice
- If a foreign investor participates in wholly owned subsidiaries – a minimum of US$10 million has to be invested. If the partnership is a joint venture with Indian partners – a minimum of US $ 5 million of investment is needed. The funds would have to be brought in within six months of commencement of business by the company.
- Original investment cannot be repatriated before a period of three years from completion of capitalization.
- The investor may exit earlier with prior approval of FIPB.
- At least 50% of the project to be developed within five years from the date of obtaining all statutory clearances.
- Investor cannot sell undeveloped plots where roads, water supply, drainage, sewage and other conveniences are not available.
- The project shall conform to the norms and standards, as laid down by the local body concerned and it would also monitor compliance by the developer.
Conditions related to minimum area of development, capitalization and time frame do not apply to hotels & tourism, hospitals and SEZ projects.
Challenges to investment in the real estate sector include:
- Overly inflated land prices, fueled by investor speculation
- Excess inventory, especially on the commercial side in larger cities
- Lack of transparency / corruption
- Bureaucratic delays in obtaining building approvals
- Lack of availability of title insurance.
To instill greater confidence in the sector, this month, the Government of Delhi announced a plan to revamp the city’s land registry system. The purpose of the ambitious project is to allow users to register real property through a highly secured online platform. The online system will enable people to register property in 13 sub-registrar offices and to check the genuineness of properties, ownership details and past transactions.
TransLegal assists clients with foreign direct investment in all sectors in India and other countries in Southeast Asia. Call us with your questions concerning the India real estate market.