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The need to have FDI in real estate sector

Shobhit Agarwal of Jones Lang LaSalle India explains about the need to introduce foreign direct investment in the real estate sector. He cites the rise in input and developmental costs as few of the reasons for the same.

Shobhit Agarwal

MD - Capital Markets, JLL India

Expertise : Property

More about the Expert...

Shobhit Agarwal
JLL India

While banks have aided most real estate development in the past, the cost of debt is getting higher by the day. The strict guidelines introduced by RBI have made real estate lending even more expensive and cumbersome.

Also read: Lower Parel's real estate mkt-- a bubble waiting to burst?

Currently, the costs of key inputs for real estate development are up by at least 7 percent. This is over and above a rise of about 25 percent last year. Labour cost is up 10-15 percent and the costs of steel and cement by about 7 percent. To add to this, funding costs have headed north.

For Mumbai, the recent DCR amendments would add to developers' costs by about 15 percent, which includes the fungible premium payable if the builder opts to take the additional 35 percent FSI option.

Cumulatively, this comes to an approximate hike of 20 percent hike in construction cost, which most developers would pass on the consumers. The Indian real estate sector is in dire need of foreign funding - both in terms of maintaining growth and for the benefit of consumers.

FDI - The only feasible option

Unlike most developed economies, India does not allow REITs (Real Estate Investment Trusts). Many would point to the M&A route, but this is also a lacklustre option as it comes at a cost of about 20 percent.

Meanwhile, REMFs (Real Estate mutual funds ) - India's tentative answer to the international REITs model, adapted to the existing Indian mutual funds platform - do not seem to be the right answer, either.

While everybody is working on entry and creating assets, the important question of who will buy these assets to provide an exit to the developers / investors needs to be addressed.

The leveraging allowed in the case of Indian REITs is the lowest (at 20 percent of the value) compared to 35 percent in case of Malaysia, Hong Kong, Singapore, and Taiwan and 200 percent in the case of Korea. This could result in a lower yield - and because it is not really leveraged, the risk factor is also higher.

With all these routes being plugged because of the risk involved, FDI is clearly the only life-saver which the real estate sector can look up to. However; the ever-changing policies on FDI, taxation and development, coupled with a lack in transparency in the system and a high amount of friction in approval mechanisms, have led to an uncertainty in yields and tenure of lock-in for investments in real estate.

Today, if a foreign investor is willing to invest for a medium term like 5-6 years, he is bound to be hesitant as it is most likely that the targeted projects would take longer than 5 years to be completed. Also, foreign investors are bound to miss out on the cream of returns, which come only after the project is in advanced stages of development or nearing completion.

This uncertainty of the quantum and time of returns is the reason why most foreign investors are currently shying away from Indian real estate sector.

FDI is slowing thanks to low yield and long gestation.

Some international and domestic real estate funds are still focused on investments in residential projects in India. Luxury housing projects are out of the picture, as they are not large enough to meet minimum size for FDI requirements.

Today, a majority of real estate investments are targeted towards the mid-income housing segment with unit typically priced between Rs. 50 lakh to Rs.1.5 crore. Now, even affordable housing projects are failing to strike a chord with investors owing to the low yield and long gestation period involved.

What Is Needed To Boost FDI in Indian Real Estate?

To enable the Indian real estate sector to meet its massive capital requirements and capitalize on the opportunities for large-scale real estate developments, the sector needs investor-friendly, streamlined policies from the Government.

The most important steps would be:

• Allowing 100 percent FDI in most real estate segments (with relaxation of certain parameters)

• Introduction of a dedicated regulatory body

• Ramping up the speed of the approval process.

These, coupled with increased transparency, adapting modern designs and technology for improved project execution and timely delivery from the industry are essential for attracting FDI back into Indian real estate.

The author is a managing director of capital markets at Jones Lang LaSalle India.

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Mumbai
Capital Values Rate/Sq ft (INR)
Aajiwali
3000 - 5000
Ambernath
3000 - 5000
Badlapur
1000 - 3000
Bhandup (West)
11000 - 13000
Chembur (East)
15000 - 17000
Chembur (West)
11000 - 14000
Dombivali (East)
4000 - 6000
Ghatkopar
13000 - 15000
Heeranandani Gardens Estate - Powai
25000 - 30000
Hiranandani Gardens Estate - Powai
25000 - 30000
Kalyan (East)
2000 - 4000
Kalyan( West)
3000 - 5000
Karjat
1000 - 3000
Khandala
8000 - 10000
Kharegaon
5000 - 7000
King Circle
17000 - 28000
LBS Marg
12000 - 15000
Lonavala
3000 - 5000
Mulund (East)
11000 - 14000
Mulund (West)
11000 - 14000
Mumbai Nasik Highway
3000 - 6000
Powai
15000 - 17000
Senapati Bhagath Singh Road
3000 - 5000
Sion (East)
18000 - 21000
Sion (West)
17000 - 22000
Tilak Nagar
12000 - 22000
Ulhasnagar
3000 - 5000
Vikhroli
11000 - 14000
4 Bunglows
17000 - 28000
7 Bunglows
13000 - 23000
Chandivali
10000 - 15000
Malad (East)
12000 - 14000
Versova
21000 - 24000
Airoli
4000 - 8000
Belapur
6000 - 9000
Ghansoli
6000 - 8000
Kalamboli
4000 - 9000
Kamothe
4000 - 6000
Nerul
7000 - 10000
Palm Beach Road
12000 - 15000
Panvel
3000 - 6000
Sanpada
8000 - 10000
Sea Woods
8000 - 10000
Ulwe
3000 - 6000
Uran
3000 - 6000
Vashi
9000 - 12000
Altamount Road
62000 - 72000
Breach Candy
62000 - 74000
Chowpathy
48000 - 58000
Colaba
42000 - 46000
Cuffe Parade
67000 - 69000
Dadar(East)
32000 - 34000
Dadar(West)
29000 - 32000
Lower Parel
32000 - 34000
Mahalaxmi
38000 - 40000
Malabar Hills
68000 - 75000
Mumbai Central
23000 - 34000
Napean Sea Road
66000 - 74000
Parel
26000 - 34000
Prabhadevi
37000 - 39000
Tardeo
41000 - 49000
Worli
36000 - 41000
Andheri (West)
18000 - 20000
Andheri(East)
15000 - 17000
Bevarly Park
5000 - 7000
Bhayander (East)
5000 - 6000
Bhayander (West)
3000 - 5000
Boisar
1000 - 3000
Borivali (East)
11000 - 13000
Borivali (West)
10000 - 14000
Dahisar
4000 - 8000
Goregaon (East)
13000 - 17000
Goregaon (West)
12000 - 14000
Kandivali (East)
12000 - 14000
Kandiwali (West)
11000 - 12000
Malad(West)
9000 - 14000
Mira Road
5000 - 7000
Naigaon
1000 - 4000
Nala Sopara (Eastt)
3000 - 5000
Nalasopara (West)
3000 - 5000
Poonam Nagar
6000 - 8000
Shanti Nagar
7000 - 9000
Shrishti
6000 - 9000
Vasai Road
1200 - 4000
Virar
1000 - 3000
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