Move to remove FDI lock-in in realty a positive: Experts

The DIPP or the Department of Industrial Policy & Promotion has proposed removing the three-year lock-in period for Foreign Direct Investment in the real estate sector. A draft cabinet note has been circulated for removal of the lock-in period.

In an interview with CNBC-TV18, Suman Memani, Associate Vice President of Religare Capital Markets and Sanjay Dutt, CEO of Business at Jones Lang Lasalle Meghraj spoke about the possible relaxation of FDI norms in the real estate sector and the implications the move might have on the sector.

Here is a verbatim transcript of the exclusive interview with Suman Memani & Sanjay Dutt on CNBC-TV18. Also watch the accompanying video.

Q: What does this really relate to? Does this relate to which is buying real estate directly or is it buying stocks in real estate company or does it relate to investing in SPVs and even if it was to happen my question is about those who are already invested because many of them are locked in which is helping some of the developers right now that they can’t take the money out – if this becomes retroactive a lot of the money may actually first flow out before flowing in – how do you really look at it on a zero sum game basis at the moment?

Memani: First of all, this is an encouraging movement which would be taken by the government if that comes through. But we presume that if the three year lock-in period is being removed then there would be a lot of investment in the form of FDI, which would be coming in. But all that would be applicable whether that would be retrospective that is a key concern because we do not think it would be a retrospective effect going forward.

We also think that if the three year lock-in period is being removed then there can be speculative movement on this particular aspect where one investor may move out to other investors at some percentage of gain. So there can be some restriction on that particular line that the government has to take into consideration.

Q: There are economies or countries where real estate is not really used for speculation and then there are countries where real estate any way is a very speculative asset like in our own country. How does this work out in terms of demand-supply which means most people can’t afford a house anyway. Now you do something like this looks like nobody will be able to buy anything. Is that the scenario that is going to play out or you think that there is going to be so much money and so much supply coming through by opening this up that demand-supply would rebalance and prices will reflect what the market will pay?

Dutt: I think the investors come to our country for return on capital and return of capital. And in that sense this regulatory change will only improve India as a country rating in the eyes of the investor.

So I personally feel that even though they maybe some short term movement which may be against the interest of the business, but in the long run our country does benefit enormously because the investors will look at it as a very positive development.

I think the flow of capital is needed. The demand-supply subject which you touched on is absolutely true. But it is more relevant for residential sector and particularly in the affordable and low costing housing sector than in the luxury or in the commercial retail where we have already seen enough over build up of supply. So, overall I think this is good news.

Q: It is good news for investors and for stocks. Would you say that immediately we are going to probably see real estate prices rising even further since the holding power of real estate companies could rise?

Dutt: There could be some movement on that. But clearly looking at from the project side, three years, most residential projects, for example if you really look at townships or indeed such large projects in Mumbai or Delhi, there the approval process, the construction process and a stage phased manner exit from that project, generally takes about 4-5 years.

So, will it really impact those projects? My answer is no. However, there would be some projects which under FDI norms- if you have a 50,000 sq meter built up and indeed the minimum level of investment where they may actually see that opportunity happening. But some of the investors who are not in good shape because of situations back home because of loss of appetite in the investors who want to exit may actually see a situation where they would exit today to align their business objectives.

But at the same time I will see this opportunity and regulatory change will bring other investors who instead of going into a Greenfield project, which are very time consuming and riskier would welcome a portfolio of assets from these investors because the comfort would be that the legal due diligence has already taken place. Everything has been sanitised and therefore it is an easier buy and less riskier proposition.

So I feel while there could be a short term hit, long term benefits will more than outdo the negative impact.

Q: The other proposal that is being considered is the ECB. The fact that foreign loans can be raised by realty companies if they are developing 100-acre integrated township projects. This along with the DIPP proposal how would you look at the real estate stocks at this juncture are there any favourites for you?

Memani: That is a good move which has been taken by the government and that has been extended from December '09 that is proposed to be extended till December 2010. A lot of liquidity would be pumped in both through the ECB norms or the FDI norms.

What that means is a lot of liquidity is expected to come into the Indian market, be it in the residential segment or in the affordability segment. That would lead to some sort of asset inflation. That is the prices of the real estate asset classes would be moving up.

So the liquidity would be chased by the demand and whether there would be concern on the supply, to that extent, we do not think that the developer who have launched the projects in large scale have taken active measures in the execution side barring a few.

So that is a major concern. But the norms which has been the ECB norms or the FDI norms which is supposed to come is positive for the sector.