The central government sent Diwali greetings to the real estate industry by announcing the biggest FDI reform in real estate since the first FDI policy in 2005. The change is impressive and the timing excellent. The industry has been cash starved due to slow sales and projects stuck and delayed due to approval hassles. The industry has been going through a tough phase, with FDI equity drying up, the industry has been surviving on expensive NCDs. The equity money has been drying up as the investors did not make enough returns for the risk they took.
|Different folks different strokes! While Surabhi Arora carries a similar optimistic approach to the newly announced FDI policy, she also feels interesting to see if these reforms will be sufficient enough to resurrect the slouching Indian real estate in the long run. Only time will tell. Read the complete story here.
The earlier policy allowed investors to invest in projects within 6 months from Commencement of Business. This forced the investors to be early stage investors and also restricted their ability to enter projects which were more mature. The announced policy now gives the investors the flexibility to enter into a project even post 6 months from Commencement of Business. So the investor has an opportunity to enter into a more advanced project. Removing minimum capitalisation and minimum project size requirement is an added advantage. Typically to match the capitalisation and minimum size requirement the investors had no choice but to participate in larger projects which would take longer to complete and exit. The new policy allows flexibility to the investor to invest in the “right sized” projects based on the micro market so they can make a suitable exit and return.
Investors typically have a fund life of 5-7 years. Earlier it became very difficult for investors to enter larger projects, go through approval hassles, construct and sell within the fund life. Due to which they did not hit their target IRRs. With the new change the investors will have access to wider range of projects to choose judiciously from, and make the right return. The three year lock-in of capital is justifiable from the context of the Indian Government and Industry. We want the capital to stay, enable business through its ecosystem and not only fuel capital appreciation and speculation. The Government offers flexibility within this too. A transfer of stake from one non-resident party to another without repatriation of money within the 3 year lock-in is allowed by the Government. This will also help foreign investors to be more aggressive in capital allocation towards Indian Real Estate.
The announced policy will be a great enabler for business and the timing of the policy ensures that the investors will have a plethora of investment opportunities to choose from. By announcing the aggressive reform the Government has made a bold statement, declaring India open for business and investment.
About the author
Nitesh Punjabi, Manager, Investment Services has over six years of experience in covering financial sponsors and related transactions. He has a strong exposure to the real estate sector and with Colliers, he works in the. Pune micro market.