FACILITATING FOREIGN DIRECT INVESTMENTS IN INDIAN BUSINESS AND INDUSTRY
FACILITATING FOREIGN DIRECT INVESTMENTS IN INDIAN BUSINESS AND INDUSTRY
In India, investments in commercial real estate is a runaway success. However, residential developers are in a downward spiral. A government crackdown on banking-sector malpractice, combined with growing credit risk among developers, has seen banks pull the plug on real estate lending. With the nonbank financial sector in similarly dire straits, developers now have nowhere to turn for finance.
But there was some cause for optimism as India has finally introduced its first REIT. This is seen as a positive omen for future Indian REIT listings. Other domestic developers, including several in South India and in Mumbai, are now looking at listing portfolios of their own, with two or three new REITs likely to come to the market in 2020.
It took five years to introduce the first REIT listing in India. The first Indian REIT listing, saw its share price shoot up some 34 per cent in its first six months, shrinking the implied yield to less than 6 per cent-a remarkably low level for a market where risk is perceived to be high. One interviewee suggested that, given higher taxes and currency volatility, Indian REITs ought to trade at a yield of some 12 per cent to 13 per cent to be comparable on a risk/return basis to the region’s major REIT markets.
Unlike REITs in most other markets, in the case of REIT listings in India, “it’s not about rent appreciation, it’s the cap rate compression story that’s driving the value appreciation.” Unsurprisingly, this is seen as a positive omen for future REIT listings in India.
Ever since FDI restrictions were lifted in 2005, the investment flow has been over $25 billion—70% of which has come between 2015 and 2019. Now, 2020 is also expected to be an action-packed year.
India’s real estate received $16.6 billion worth of foreign direct investment (FDI) in 2015-2019, a whopping 84.4% increase over the quantum of investments that flowed into the country in 2005-2014. Overall, since 2005, when restrictions on FDI in real estate were lifted, the sector has received more than $25 billion in funding.
Since 2015, the funding has largely been on big-ticket income-yielding commercial and retail assets. While Singapore-based funds led by GIC remained very active in this period, US-based funds led by Blackstone continued their love affair with Indian real estate and invested more than $5.7 billon in the same period,
Ever since FDI restrictions were lifted in 2005, Singapore-based funds were the first to cash in on the opportunities quickly, followed by funds from the U.S. and Europe. In fact, between 2005 and 2008, Indian real estate received investments worth $5.7 billion. Considerable activity here came from capital providers like JP Morgan, Morgan Stanley, Goldman Sachs, Lehman Brothers, Wachovia, Walton Street Capital, etc. and Singapore-based developer capital providers like Ascendas, Xander, Mapletree and CapitaLand. However, post-2008, most funds withdrew from India because of limited exit opportunities. As a result, in the ensuing six years, only $3.4 billion worth of FDI was pumped into the real estate sector.
In 2020, FDI in real estate is likely to remain on Grade A income-generating assets along with last-mile funding opportunities in residential projects.
Finance Minister, Nirmala Sitharaman presented the Union Budget 2020-21 on 1st February. Here are the highlights of the budget for the real estate sector:
The deductions on affordable housing were allowed on housing loans sanctioned on or before 31st March, 2020. To ensure that more people avail this benefit and to further incentivise the affordable housing, the date of loan sanction has been proposed to be extended by 1 year and a tax holiday is being provided on the profits earned by developers of affordable housing project approved by 31st March, 2020 to boost the supply of affordable houses in the country.
Currently in real estate transactions, while taxing income from capital gains, business profits and other sources if the consideration value is less than circle rate by more than 5%, the difference is counted as income both for the purchaser and seller. In order to minimize hardship in real estate transaction and provide relief to the sector, it has been proposed that the limit be increased from 5% to 10%.
Rs.100 lac crore (approximately US$ 1.5 Trillion) would be invested on infrastructure over the next 5 years across various sectors like housing, basic amenities, energy, healthcare, educational institutes, transportation, logistics and warehousing, irrigation projects, etc.
The year 2019 was a period of many highs and lows for the Indian real estate market. The ongoing NBFC crisis resulted in a liquidity squeeze and the slow pace of recovery in sales. However, on the positive end, the successful launch of India’s first Real Estate Investment Trust (REIT) opened new avenues for investments while multiple positive government initiatives provided a much needed relief to the sector. The housing sales value of India’s top 9 listed players touched a whopping Rupees 108 billion in the 2nd and 3rd quarters of 2019, amounting to a 5% growth QoQ. Housing sales in 2019 saw a modest 4-5% annual growth with over 258,000 homes sold during the year. New housing launches in 2019 saw 18-20% annual growth and developers are hoping that sustained efforts of the central government like additional deduction on loan interest, GST rate cut, alternative investment fund for stalled projects and changes to credit guarantee scheme would strengthen the sector, especially affordable housing-led growth.
In 2020, the government’s stressed asset fund is expected to play a key role in fulfilling last-mile funding for liquidity-hit stalled projects, according to an assessment by CARE Ratings. According to experts, residential growth in 2020 will mainly depend on the swift on-ground implementation of some of the previously-announced sops. If not, then buyer sentiments will be impacted negatively. Second half of 2020 will see the most traction for the real estate sector and only the financially stronger players will stay ahead in the game. It is also expected that many large real estate companies will witness multiple IBC-led resolutions. Hopefully, with this buyer sentiment will improve and also revive demand of housing units in NCR and Mumbai-MMR.
Ever since FDI restrictions were lifted in 2005, the investment flow has been over $25 billion—70% of which has come between 2015 and 2019. Now, 2020 is also expected to be an action-packed year.
India’s real estate received $16.6 billion worth of foreign direct investment (FDI) in 2015-2019, a whopping 84.4% increase over the quantum of investments that flowed into the country in 2005-2014. Overall, since 2005, when restrictions on FDI in real estate were lifted, the sector has received more than $25 billion in funding.
Since 2015, the funding has largely been on big-ticket income-yielding commercial and retail assets. While Singapore-based funds led by GIC remained very active in this period, US-based funds led by Blackstone continued their love affair with Indian real estate and invested more than $5.7 billon in the same period,
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