FDI in Indian real estate: 5 year trends

In March 2005 the Indian government issued “Press Note 2″ which opened up the sector for Foreign Direct Investment in Indian real estate.  The minimum investment ticket sizes are $10m alone or $5m in conjunction with an Indian partner.  The capital must be retained in India for at least 3 years but profits can be re-patriated earlier.  Speculative land buying and holding or selling on its own without development is not allowed.  The minimum size for plotted developments including infrastructure such as adding utilities, service roads, sewerage facilities, etc must be at least 25 acres.  Construction developments projects must cover a built-up area of at least 50,000 sq metres. 

Many foreign institutions sensing the vast opportunities in this sector that India undoubtedly offers jumped in.  Needless to say many either got their fingers burnt or just could not navigate the maze of bureaucracy and complexity that one can often find in India and decided to pull out.  Raw land without any plans for infrastucture connections in the near future was changing hands at absurdly high prices.  Without essential transport links, schools, hospitals or other amenities just pent-up demand from consumers or businesses was not sufficient to actually sell developments. 

Many India real estate funds were set up including on London’s AIM market.  Many of these funds have not been performing well as they acquired land with “planning permission” at the top of the market at very high values which enriched the promoters many of whom simply saw this as a way of “cashing out”.  Then the credit crunch hit India, the supply of money and mortgages became tight and many of the more speculative developments simply cannot attract end-users.  The Indian end-user is a very canny buyer and justifiably demands value for money.  Many investors and developers simply forgot this simple truth and have suffered as a consequence.

Another mistake made by foreign investors was to go for large scale projects involving large tracts of land – the project SPVs often buying 300 or 400 acres or more for mixed residential and commercial development.  The entire planning, environmental clearances and regulatory process can become a potitical “hot potato” in India  for large scale or high profile projects many of which meet with “objections” from villagers, political opposition parties and environmental groups.  Also such large tracts of land can only be found in remote areas outside of major commuter belts and it takes a long time for infrastructure to encroach sufficiently to make marketing possible.  

The trick for foreign investors is to dip their toes in a “small” way in partnership with a reliable Indian partner who has a track record of completing and selling off or leasing developments within a reasonable time frame.  FDI investors should partner with promoters who already “own” the land and have already obtained the necessary planning consents rather than tie-up with those that will go out looking for suitable land and do not yet have fully formed projects. 

“Safe” investments are residential developments on the outskirts of major metros such as Mumbai or Delhi provided “bite-sized” land chunks meeting FDI criteria can still be acquired at reasonable prices, there are rail or other transport links and availibility of jobs such as a new BPO, manufacturing or other industries starting up in the vicinity.  The developments should be geared to the “mass” housing segment rather than aimed at “luxury” buyers who are thin on the ground at the moment.   Some developers have tie-ups with Indian banks offering mortgages or subscribe to various government financing initiatives to help first time buyers on to the housing ladder.

The SEZ legislation was introduced to offer tax breaks and other benefits for mainly office and commercial development but many commentators are of the view that SEZs are yet to be seen as a success and in many places SEZs have had their share of problems.  FDI investors should be highly wary and sceptical of IT office, retail, malls and commercial developments in general in India in the current economic environment.  We believe investors should focus on affordable residentail housing opportunities outside of major metros such as Mumbai and Delhi where the outward expansion of these congested cities will continue to take place.  “Infrastructure” projects can be attractive such as in logistics, warehousing, ports, transportation and also in the “clean” energy sector.  Although such projects can have a real estate basis this is a really a different subject and calls for expertise in the areas concerned and are not for uninitiated investors.