|Q : What do NRIs look for in terms of projects - what kind of projects in terms of real estate can they look forward to and not just NRIs but PIOs,. Foreigners?
A: I would like to clarify in the beginning that what has been done recently in March is permitting FDI with instruction development sector. It is not in the real estate sector per se. In the sense can't buy real estate and just sell it. You have to develop it, construct upon it or at least put in the minimum development and then you can sell it. So this is what has been permitted in March last year and NRIs. PIOs and all foreigners can look forward to equal treatment with their Indian counterparts in this sector.
They can invest in land, buy it, construct upon it or just develop it, sell constructed buildings or just sell developed plots, which they weren't allowed to do earlier. But the new policy is different from the old one in more ways than one. Earlier on, all this had to come with prior government approval and now for all construction development projects; we can welcome FDI without government approval. It is called the automatic route. Besides initially it was restricted only to the housing sector and now it has opened up. It is townships, housing, commercial area, and infrastructure development whatever. It also includes recently developed plots.
Thirdly there were certain restrictions in terms of minimum area of land, minimum number of units etc but now all this has been set aside and we only designate it in terms of minimum constructed area - 50,000 sq .mts of construction is has to take place if you go in for a construction project and depending upon your FSI you can decide the plot size and that is not important and on other hand if you go in for the developed land and you are selling developed land it is 25 acres.
Q: What exactly is the automatic route?Q: What should an overseas investor look at while studying the Indian real estate market depending on the kind of project they have in mind and how should one go about considering the notion that Indian real estate market lacks a lot of transparency?
A. Now one doesn't have to go to the Reserve bank and do the paper work. There is also no need to go to Foreign Investment paper board, which was the case earlier and that gives more confidence. The paper work has eased and given the clients confidence for investing in India.
There is certainly lack of transparency although it is improving now. So any NRI trying to look at the market should first look at which segment he wants to get into like residential, retail or office base. They should consult legal firms, real estate firms and study the market. Several times in the past, when they took advice from relatives and friends they burnt their fingers. While the real estate market is booming at present one still needs to be cautious and go for professional advice. Besides it should be for long-term, which is important.
Q: In your capacity as a consultant - what advice can you give for people on how they can get all the clearances and how should they go about it and whom to meet in the process?
A. It depends on the segment they want to invest in. If one is going for office market investment then they should first get in touch with consultants for advice on the city they should go into. Before all this they should be clear about their objectives, the size of investments and the returns they are looking at.
Based on several parameters the yield should be anywhere from 8-8.5% to 12% for office while in residential the returns would be from 4 to 6%. So it all depends whether the land is for investment or to develop. And in that case it is a completely different ball game where they have to see the local demand-supply situation. At the end of the day they have to know what the micro market offers - what is the future and if one is looking at investment then what are the utilities available. Like in India one has to very cautious about the infrastructure such as the power situation, connectivity, security facility and the future plans in the long-term. All these aspects are important.
Q: With your experience with clients how easily can people get a one window clearance?
In cities like Delhi there are multi agencies. Many authorities do create a problem but in certain states the old laws still continue to hold good because real estate is a state subject and the Central government can't do much. But few positive steps have been taken; like property tax used to be a big issue, the stamp duties used to be high. In some states they have turned into Unit Area method of taxation. Stamp duties in some places have come down and they need to come down further. Overall for the approval process there are still hurdles for eg if you put up a hotel in India you need 40 permissions etc.
Single window sometimes in a real estate project may be difficult because there are several authorities. For instance when you are constructing a building if it's a multi-storied building then firstly there would be town planning people from whom you would need to get clearance on the design and then lifts, fire fighting agencies etc. One cannot wish away those authorities but things can be made more transparent and simpler.
Q: How can we make this whole process more transparent for a foreign investor?
A. As pressure builds up, awareness increases and it is not as though nothing is happening but things need to happen faster and I think they will but I think it is all a part of administrative reform. Of course nothing can happen overnight.
Q How are the sanctioning authority and monitoring authority different?Q. How serious is the black money payment problem? Most of us have no idea how to tackle it and we may lose our hard earned money. Is there a way out?
In most states it is the municipal authority that is the ultimate monitoring authority. So in some smaller states or in non-urban areas; it is sometimes the town & country planning but in urban areas where we expect most of the construction to take place it is the municipal authority and ultimately it is this authority that asks you to get clearances from electricity, water supply etc and they are the ones who give you final permission and sanction your drawings and plans hence they are the ones who will monitor all.
Indian real estate and construction industry has long suffered due to high incidents of black money transactions. High stamp duties and complicated transfer policies and investor laws and lack of transparency in the transactions were promoting large-scale tax evasion. Buyers and sellers prefer to pay black money or unaccounted money to seal the deal rather than pay the high taxes.
But with reforms coming in the income tax laws things have started looking up though; lowering of stamp duty and property tax in some states have also led to cutting down the menace of black money as the State gears up in anticipation of large-scale investments.
Q: In case of NRIs and foreigners, their money comes in as white money. So is this going to affect FDI in any way- this black money problem?
It isn't really a problem. I agree with Anshuman's analysis particularly on the point that in fact the black money component has reduced tremendously in the last ten years and with reforms in property laws, property taxation and stamp duty, things will simply improve further. I don't really think it is such an issue at all today. And somebody who has only white money and wishes to invest through cheque payment, I don't think will face any problems whatsoever.
Q. As per the new FDI norms the minimum investment has to be USD 5 million for 51% shareholding. Now does this involve funding of subsidiaries as well?
If you have a wholly owned subsidiary by a foreign company then the minimum capitalisation norm is USD 10 million and if you have a joint venture; whether it is 74:26 or 51:49 that is immaterial. If one has a joint venture then minimum capitalisation is USD 5 million in foreign exchange. India real estate and construction industry has long suffered due to high incidents of black money transactions. High stamp duties and complicated transfer policies and investor laws and lack of transparency in the transactions were promoting large-scale tax evasion. Buyers and sellers prefer to pay black money or unaccounted money to seal the deal rather than pay the high taxes. But with reforms coming in, the income tax laws, things have started looking up though; lowering of stamp duty and property tax in some states have also led to cutting down the menace of black money as the State gears up in anticipation of large-scale investments.
Q: Now does this involve funding of subsidiaries as well?Q: And how long do you have to actually finish actually your construction development work?
If you have a wholly owned subsidiary by a foreign company then the minimum capitalisation norm is USD 10 million and if you have a joint venture; whether it is 74:26 or 51:49 that is immaterial. If one has a joint venture then minimum capitalisation is USD 5 million in foreign exchange. That's all that has been said. And this money this USD 10 million if it is wholly owned by a foreign entity or USD 5 million if it is a joint venture for Indian company this minimum amount of foreign exchange has to come in within six months of the date of commencement of business. Earlier on it was required to come in up front etc. Now you have been given six months to bring that money into India, not necessarily utilize it but to bring in India.
Well you have very generous norms; five years to finish at least finish 50% of your project from the date of getting all your clearances which I think infact you should be completing your project within three years in the normal course. But anyway its extremely generous really but there is a norm simply to protect the customer. So you don't have fly by night people coming in and things like that.Q: Do you think it's a generous norm? Is enough time being given to customers?
Magazine: Ya, I think the timing is enough, but where we can be bit more you know as you mentioned earlier that you don't want people to come and speculate. But the fact is that we have enough mechanism in place to make sure we can avoid speculators. So my only wish is that we open up more sooner than we plan. And also really looking at what happens in the next two years time and I expect in the next two years time the market dynamics completely changing and I think then we could be more liberal. So instead of waiting for five years I think we should look at a smaller horizon to further liberalise and get in more investments.
Q: So overall you are very optimistic. Would you have any summing thoughts just 2-3 points you know things that we could do to moving forward in the next 5-10 years?
I am optimistic because in the very first two months of announcing this policy over USD 12 millions have come in just April and May of this year. But what we are looking at really is not really investment per se. It is what comes along with that investment. We are hoping to catalyse investment because of the multiplier effect on the economy that it would have. We want to look at the technology that is going to come in, the infrastructure that will be built as a result and also the fillip that it will give to associated industries such as steel, cement, building material, designers etc not to forget the jobs it will provide to unskilled, semi-skilled workers, artisans, engineers, architects and the like. So it is the multiplier effect on the economy that we are looking at and I think things have been moving in that direction.
Q: So you see a lot of potential for joint ventures instead of unfairly competition?Competition is always important and good. But I think that joint venture in this sector when you are talking about FDI is probably the better route to go. Because the Indian partner can always provide that input which you are talking about in terms about how to get land, clearances whether the foreign investors can put their money, technology and whether both together can compliment each other. I think there is a great deal of scope for joint ventures in this area; though of course 100% owned company is not ruled at all.
Q: Summing up thoughts do you think that the joint ventures are the way to go. You know is this something that is going to give a fillip as Mr De sa said to the whole issue of FDI in real estate in India?In the last 10 years, the FDI that India has got in totality is what China gets every year. So we are still far behind. What happens is that because we have done relatively well everybody is excited and euphoric but the fact is that we have a long way to go. Our infrastructure is far behind and I feel having said that there is a lot of optimism; there will be lot of interest.
All are large foreign investors who are looking at India. Their main goal is a joint venture. In fact the first couple of transactions or strategies have struck large joint ventures. In my opinion in the initial years primarily most of the FDI that comes in will be through joint venture. And then it will pan out and people would have more foreign investors and more confidence to their own way.
It is very good and I am very excited that the coming years will be good for the real estate industry as far as investment and developments are concerned. But we should not forget about the need to improve infrastructure and implement the reform process besides things like taxes, or computerising land records and bringing in transparency in the sector
Source: South Asia World