India is attempting to recast its image as a viable, transparent and liberal investment environment to reengage international investors. Borne out of policy ineptness and regulatory constraints in the past a slew of reforms have been proposed to open up the real estate sector. These include easing barriers to entry into the nation’s Alternative Investment Funds (AIFs) regime making it easier to set-up funds in India, amending foreign direct investment norms to give global investors unhindered access to the property sector, and approving the much-awaited Real Estate (Regulation and Development) Bill to increase accountability of developers.
By officially rolling out these reforms, Prime Minister Narendra Modi is holding true on the economic promises he made in the first budget address early last year after taking office. While industry observers agree these reforms have made real estate laws less ambiguous and will enable more foreign capital inflows into the sector over time, they are also mindful of other regulatory overhangs that still need to be dealt with.
In November last year, the Reserve Bank of India, the country’s central banking authority, passed a notification permitting non-resident Indians and registered foreign portfolio investors to invest in Indian investment vehicles, so long as the vehicle is registered with the market regulator Securities and Exchange Board of India (SEBI) and is sponsored or managed by an Indian fund manager. This means managers of Real Estate Investment Trusts (REITs) and AIFs can raise any amount of capital from international investors without prior approvals.
“Now domestic fund managers can tap into the non-resident Indian [NRI] population without having to set up a base offshore,” says Nitin Goel, managing partner for real estate investments at the Mumbai-based Milestone Capital Advisors. “NRIs can now invest directly in a new AIF vehicle as long as they have a pan card [a national identification number issued to all Indian taxpayers].”
Great news for funds marketing retail investors, but the challenge of soliciting capital from foreign institutional investors remains.
“Foreign institutions would not have a pan card. It is a foreign portfolio investment vehicle, it would need to still be registered with SEBI, which has its own complications. Somewhere in the implementation versus the policy intent, there is still a gap which overtime should get sorted,” says Goel.
A little over a month later, the Union Cabinet also approved the much-awaited bill, designed to ensure timely execution of projects – a major challenge for residential property development in the country. The bill seeks to establish a real estate regulatory authority to govern the sector, and will penalize developers who launch projects without obtaining necessary approvals. It has also made it compulsory for developers to deposit 70 percent of the capital raised from buyers in an escrow account to ensure project completion and avoid funds being diverted to another project.
The Modi government has also lifted other foreign direct investment restrictions inhibiting the real estate sector. Foreign investors are now allowed to exit their investments in a property project after a three-year lock-in period, or earlier if the trunk infrastructure is completed beforehand. In the past, investors could not withdraw capital before a project or its required infrastructure was fully completed.
Additionally, the minimum requirement norms mandating foreign institutions to invest at least $5 million capital in 215,000 square feet of development have been scrapped.
“A lot of ambiguity has now been clarified and that has taken uncertainty away from investors’ minds. Now that there are no limits, smaller-sized international players are also expected to come forward to invest,” says Anshuman Magazine, chairman and managing director for CBRE South Asia.
While the needle has moved forward in terms of reforms, the industry has further expectations from the government.
SEBI's committee on AIFs – a 21-member team led by the founder of Infosys Narayan Murthy – will be sharing its proposals on taxation reforms, the development of domestic pools of capital, attracting overseas managers, and how AIFs are categorized in the regulatory regime, with the government ahead of February’s annual financial budget.
At press time the government’s response had not been announced, yet the Indian property industry remains hopeful that continuing reform will unlock the market for foreign investors.