Fitch: New FDI Policy a Long Term Positive for India Real Estate

Fitch Ratings believes that the easing of investment norms under Foreign Direct Investment (FDI) policy for the real estate sector is more of a long term story, and is unlikely to result in any immediate increase in FDI in the near term. The policy, which became effective on 24 November 2015, removes the earlier conditions on minimum investments (of USD 5m earlier), minimum area and also eases exit options for the FDI investor.

The Indian real estate sector has been challenged by frequent delays in project completion and a long/ complex approval process. The weak demand in recent times has added to the challenges. With these issues continuing to impact the sector, we believe that investment flows will remain slow and limited to a few selective projects in the next 12 months.

Investment flows in to the real estate sector have slowed down over the last 18 months. FDI in so called construction-development projects fell by over 38% during the year ending March 2015 (FY15) to USD 758m (FY14: USD1,226m). The FDI flow has remained weak  this year with just USD34m of investments in  1QFY16.

We expect the investments to pick up over the next two to three years along with the expected improvement in demand in the real estate sector. Furthermore, the easier exit options allowing FDI investors to cash out after a lock-in period of three years without linking them to any execution delays and ability to invest in completed projects may improve the appetite of investors. Fitch expects FDI investments to reach about USD1.5bn annually over the next two to three years.

The increase in FDI is likely to bring more transparency in the Indian real estate sector, while also resulting in more timely completion of projects and improved construction quality with access to better technologies.

The affordable housing segment has so far witnessed a weak response from developers and fewer completed projects, notwithstanding the government focus and the potential for the sector to benefit from the easing of FDI policy. We do not expect meaningful foreign investment flows into this segment until investors are better able to assess the risks unique to this segment, and this will require a significant increase in the number of completed projects.