Opportunities for foreign investors in Indian Realty Sector
The Indian economy is forecasted to record GDP growth higher than China, making it the fastest in the world during FY 2015-16. The positive economic outlook, progressive
trade and industry policies and government initiatives have attracted significant investments in India during the last couple of years. The total foreign direct investments during
FY 2014-15 recorded 23% growth to USD 44 billion, whereas the first half of FY 2015-16 has already witnessed FDI flows of USD 24.4 billion into India. In particular, the commercial
real estate segment gained significant momentum in 2015 and is set on the growth path whereas the residential segment witnessed significant rise in Private Equity in Real
Estate (PERE) investments owing to high yield structured debt (SD) investment strategies that offers stable and secured returns at pre-decided terms.
Private Equity Real Estate (PERE): On the back of improving economic conditions, the PERE investments have grown at over 30% compound annual growth rate (CAGR) since 2010. The period between 2010 and 2015
received USD 10.8 billion in PERE investment, of which 60% (USD 6.5 billion) of the investments were made during the last two years. The total PERE investments made during 2015 alone stood at USD
3.96 billion. The total structured debt investments grew by 111% in terms of value to USD 1.96 billion (49% share) in 2015 as compared to USD 0.9 billion (37% share) recorded in the previous year.
While the number of PERE deals grew by about 23% y-o-y, the share of structured debt deals increased to 72% of the total deals during the year. However due to rise in competition from investors and improved
economic scenario, coupon rates for structured debt have reduced to an average of 15% - 17%. Within the top eight cities in India, the three major cities i.e. Mumbai, Bengaluru and Delhi NCR account for about 65% of Grade A office stock.
The three cities together accounted for over 85% (USD 3.7 billion) of the cumulative structured debt investments made between 2010 and 2015. Mumbai continued to receive the highest PE investments and accounted for over 32% of the structured
debt investments Structured debt deals in the residential segment witnessed a remarkable growth of over 86% in 2015. At the end of 2015, the residential segment accounted for over 82% of the total structured debt investments followed by office
at 13%. Leveraging from the benefits of structured debt such as secured and stable returns coupled with relaxation in FDI norms in real estate sector, these investments are likely to increase in non-residential segments over the next few years.
The domestic funds in 2015 were significantly more active and doubled their structured debt investments to USD 3.2 billion for the period 2010-15, up from USD 1.6 billion during 2010-14. However, foreign funds have also increased their
investments by 47% to USD 1.2 billion during the same period, indicating rising investor confidence in the Indian realty market.
KEY REGULATORY CHANGES: REAL ESTATE INVESTMENTS BECOME MORE ATTRACTIVE
Owing to the stringent government policies, the Foreign Direct Investments (FDI) in the "Construction Development:
Townships, Housing, Built-Up Infrastructure" segment during FY 2014-15 declined 37% to USD 796 million. The period
between Apr-15 to Sept-15 has recorded a mere USD 81
million in FDI as compared to USD 568 million recorded
during the same period in previous year. Therefore, to regain
foreign investors' interests in the Indian Real Estate market,
the government relaxed its FDI policies in November 2015.
The key amendments to the FDI regime are:
100% FDI under the automatic route is permitted in construction led development projects including
townships, construction on residential and commercial premises, roads &bridges, resorts, hotels, hospitals,educational institutes, recreational facilities, city and
regional level infrastructure.
The condition for minimum floor area of 0.22 million sq.ft. in construction development projects and minimum capitalization of USD 5 million to be brought in within the period of six months of the commencement of business
have been removed.
The investment will have a lock-in period of three years for each tranche of investment, however investors are permitted to exit at any time upon completion of the
project or after development of trunk infrastructure i.e. roads, sewage, drainage, water supply & street lighting.
The lock-in-period condition is not applicable on special economic zones, hotels and tourist resorts, hospitals, educational institutions, old age homes and investment
by Non-Resident Indians (NRIs).
The transfer of stake between non-resident investors is permitted without repatriation of investment. The transfer of stake will not be subject to any lock-in period and will not require government approval.
The government also clarified that the FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights
MARKET POTENTIAL AND REASON FOR FOREIGN INVESTORS TO INVEST IN INDIA
The Foreign Direct Investment (FDI) policy enforced conditions with regards to project status, project size,
lock-in periods, etc. due to which the eligible stock of realestate projects for foreign investors was limited
predominantly to large projects with development size of over 0.54 million sq. ft. The Modi led BJP government
however made subsequent relaxation in FDI policy for real estate investments in 2014 and 2015. The new relaxed
guidelines made the entire real estate stock, completed or under construction, eligible for foreign investments.
At the end of 2015, the market potential includes completed Grade A office stock estimated between
USD 54 billion to 67billion potentially able to generate USD 5.4 billion of rental income. On the residential side,
the market potential includes 900,000 units that are scheduled for completion in the coming 4 years.
The overall PE investment from foreign funds have almost regained the 2008 investments volumes. As of December
2015, about 34% of the total FDI in India were routed via Mauritius, due to bilateral tax avoidance treaty with India.
As stated in our February 2015 ANREV red paper, high yield debt has become a commoditised but stable product. It is
an attractive investment strategy for investors as the deal is structured in a manner that provides assured returns along
with a possible up-side. The investments are fully secured assured and offer assured returns to its investors. Though
the pricing levels for borrowing in the commercial space have moderated to about 15%-17% at the end of 2015, it still
remains as one of the preferred investment strategies of investors.
The banks in India have stringent norms that are governed by the Reserve Bank of India which restrict them in terms of
flexibility of payment terms, tenure, project status, etc. therefore real estate developers prefer to sign-up deals with
PE investors that can structure a deal on case by case basis. With relaxed FDI guidelines, real estate focused government
initiatives and growing market, the Indian real estate holds a vast opportunity for investors seeking to invest in Indian real estate.
Source: Cushman & Wakefield India.
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