Real Estate in India

The real estate sector in India is being recognised as an infrastructure service that is driving the economic growth engine of the country, according to industry experts. In fact, foreign direct investment (FDI) in the sector is expected to increase to US$ 25 billion in the next 10 years, from present US$ 4 billion, according to a latest industry body report.

As per a report released by the McKinsey Global Institute (MGI)–India's urban awakening: Building inclusive cities, sustaining economic growth–on April 2010, the country's urban population will soar to 590 million by 2030, from 340 million in 2008. India's cities could generate 70 percent of the net new jobs created by 2030, produce more than 70 percent of the country's gross domestic product (GDP), and stimulate a near four-fold increase in per capita income. It also says that India needs to invest US$ 1.2 trillion over next 20 years to modernise urban infrastructure and keep pace with the growing urbanisation.

Further, growth prospects and price stability of smaller cities are attracting large real-estate developers in such cities in the recent past, according to a report titled 'Real(i)ty Next: Beyond the Top 10 Cities of India', released by Crisil Research in June 2011. The report estimates that the sale of new residential apartments in 10 such smaller cities at around US$ 4 billion in 2012.

Non-resident Indians and foreign citizens who are Persons of Indian Origin (PIO) are allowed to purchase immoveable property in India. Residential property prices have stabilised now and are deemed attractive for the NRI home buyer. Industry experts feel that with attractive pricing and innovation in construction technology and variety of designs, NRIs are taking a fresh look at India as a unique market in which they can invest.

Real estate emerged as the popular sector for private equity (PE) funds, which witnessed investments worth US$ 1,700 million in the sector during 2011.

PE in real estate projects will fetch considerable returns by next year-end or early 2013, says Vikram Hosangady, partner, KPMG. "Limited partners (who write cheque for funds) expect 15-25% returns from real estate deals. Foreign investors are optimistic about India. All they want is prompt action and friendly policies," he says.

In fact, during January-May 2011, the sector witnessing various PE and M&A deals, according to research firm Venture Intelligence. Around 20 deals worth US$ 1.3 billion took place during the period, as compared to 22 deals worth US$ 483 million last year.

Some of the major deals during the period included Jeff Morgan Capital's investment of US$ 320 million in Compact Disc India's film city project, Warburg Pincus' investment of US$ 318 million in Oceanus Real Estate and Ascendas India's investment of US$ 190 million in Phoenix infocity.

Tata Realty also invested US$ 86 million in Peepul Tree Properties along with around US$ 65 million flowing to Archean Group, Chennai from a PE investor.

According to major research firm forecasts, the sector would continue to witnessing growing investments.

• According to the ULI-PricewaterhouseCoopers (PwC) report titled 'Emerging trends in Real Estate ® Asia Pacific 2011', which surveys comments from 150 industry leaders across the Asia Pacific region, India leads the pack of top real estate investment markets in Asia for 2010.
• The report forecasts that India will continue to maintain a GDP growth momentum of 9-10 percent by 2015 as the country will witness new private equity in capital markets which will inject capital in infrastructure projects.

As per the Worldwide Quality of Living survey 2010 brought out by HR major, Mercer Consulting, for 221 cities globally, Bengaluru continues to remain the best placed among Indian cities in the global list at 140th rank this year, improving from its last year ranking of 142. Bengaluru has once again emerged as the best Indian city in terms of the quality of living for expatriates.

Other avenues for investment include:

• Commercial complexes
• Multiplexes
• Restaurants and Hotels
• Malls and shopping complexes

In his Budget speech for 2011-12, Mr Pranab Mukherjee, Union Finance Minister, has endorsed raising the limit on housing loans eligible for a 1 percent subsidy in interest rates, and widened the scope for housing under "priority-sector lending" for banks, making interest rates cheaper on these.

Further, the allocation for Bharat Nirman has been hiked to US$ 12.89 billion. Bharat Nirman consists of 6 flagship programs, the Pradhan Mantri Gram Sadak Yojana (PMGSY), Accelerated Irrigation Benefit Program, Rajiv Gandhi Grameen Vidyutikaran Yojana, Indira Awas Yojana, National Rural Drinking Water Program and Rural telephony.

Meanwhile, the relaxed FDI rules implemented by Indian Government have attracted more foreign investors and real estate in India. The revised investor friendly policies allowed foreigners to own property, and dropped the minimum size for housing estates built with foreign capital to 25 acres (10 hectares) from 100 acres (40 hectares). The overseas firms welcomed these modifications and they can now put up commercial buildings as long as the projects surpass 50,000 square meters (538,200 square feet) of floor space.

The Reserve Bank of India (RBI) has granted permission to foreign citizens of Indian origin to purchase property in India for residential or commercial purposes. The purchase consideration should be met either out of inward remittances in foreign exchange through normal banking channels or out of funds from NRE/FCNR accounts maintained with a bank in India.

According to the latest reforms,

• FDI up to 100 per cent under the automatic route in townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) is allowed subject to the following guidelines (also for investment by NRIs)
• The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/ Municipal/ Local Body concerned
• The investor/ investee company shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/ bye-laws/ regulations of the State Government/ Municipal/ Local Body concerned
• The State Government/ Municipal/ Local Body concerned, which approves the building/ development plans, would monitor compliance of the above conditions by the developer

Sources: Consolidated FDI Policy Department of Industrial Policy and Promotion (DIPP), CII Real Estate Whitepaper and Ministry of Housing & Urban Poverty Alleviation