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Real estate sector wants FDI into freehold land, but..

Spectrum News

Foreign direct investment into freehold land is an announcement that the real estate sector is expecting in the Union Budget 2000-2001.

Across the sector, builders, investors, real estate consultants are hoping that barriers of nationality will be lifted to allow investments in immovable property in India.

However, sources suggest that the Union urban development ministry is strongly against allowing FDI into the sector. This means that the sector will be continue to be protected for the people of Indian origin and NRIs.

Niranjan Hiranandani, chairman of the FICCI national committee on housing and managing director of Hiranandani Constructions Ltd, says: FDI is always welcome. But the government should enforce a lock-in period of three to five years as we would not like hot money to come in as in happens in the stock markets."

However, according to chartered accountant Subhash Chandra Mutha of the S C Mutha & Company, the government really has no alternative but to allow FDI into real estate.

Mutha says: "The government's divestment plan is expected to bring into the market large tracts of vacant and developed land. If foreigners are not allowed into the sector, which Indian corporate has the money to buy up the large government properties."

The non-resident Indians are demanding a relaxation of investment norms. Currently, NRIs are needed to invest through various government-formulated schemes some of which prevent repatriation profits or which make it difficult to repatriate funds.

This continues to be a disappointing factor for the NRIs who would like to increase investments in the sector as they fear no competition from foreign direct investors and do not need expertise in construction as the entire work can be outsourced.

On the relaxation of the NRI investment norms into the sector, the Group of Ministers on the FDI policy has already tabled its recommendations to the government.

It has suggested that NRI investment be treated on par with the regular FDI policy where profits from investments can be repatriated in the form of dividends.

The only foreign participation into the real estate sector is from realty consultancy firms. Some of the foreign consultancy firms who have set shop in India include Colliers Jardine, CB Richard Ellis, Chesterton Megharaj, Cushman, Knight Frank, and Cushman & Wakefield.

These consultants are only bound by a 5 per cent service tax restriction on their earnings which is directly passed on to their clients.

Housing finance is another area that the finance minister may address so that there is an increase in offtake of loans from the sector, which in turn will rekindle activity in the construction arena.

Already banks lending to the housing business have started according priority to sector lending which means that 30 per cent of their incremental deposits have to be diverted to housing or housing-related activities.

Housing finance sources say that income tax exemption on interest accrued on housing loans may soon be raised from the present limit of Rs 100,000.

However, the teething problem that the sector is looking forward to be addressed is that of regulations. Sources inform that the real estate industry continues to reel under a monopoly of builder lobbies, real estate brokers and landlords.

Anyone who has money is allowed to enter the sector without any entry barriers. The problem is that of non-availability of secure money in honest hands.

Medium and small investors in the sector are looking forward to more regulatory frameworks to control the quality of building projects and creating some checkpoints for people entering the industry.

Announcing guidelines for foreclosure laws will solve part of the problem of making secure investment. As Tariq Vaidya, head of advisory services at Knight Frank, says: "Guidelines for foreclosure laws is something that the real estate sector is anticipating. But it is doubtful if any guidelines will be announced as no groundwork for this has taken place through the year."

"The government may, at the most, continue to have more fiscal benefits to boost housing finance markets. Last year, the sops announced helped Housing Development and Finance Corporation to have a 38 per cent year-on-year increase in their disbursals," he said.

But tapping the secondary market resources and stringent foreclosure norms so that securitisation can take place is what the sector needs.

Real estate consultancy firm Brooke International vice-president Ashok Kumar says: "The industry would be looking forward to the age-old demands which the government fails to fulfill. One of the prime expectations of the sector would be the secondary market mortgage where one can pledge loan portfolios and borrow money from the secondary market. This way more funds will be available to the sector."

But optimism should not run high cautions Advocate Vinod Sampat, who is also the patron member of the Estate Agents Association of India. He says: "It is going to be a soft budget for the real estate sector. Nothing to look forward to. The government will concentrate on other issues."

The good secure money is what the sector needs. The euphoria of 1993-94 when property prices peaked and investors were hot on investments has calmed.

Many who rushed in hoping to make quick and huge returns on investments have burnt their fingers, including some big corporate houses. Some of the well-known corporate investors were Lloyds, Videocon, the Mahindras, Godrej, the Kirloskars, Tata Housing, Lalbhai Realty and Essar. Today, only Godrej and the Mahindras seem to have definite long-term plans for substantial investments in the sector.

So Yashwant Sinha needs to take a long and hard look at the sector through his budget even as the industry keeps its fingers crossed. There is little other choice….

Budget 2001: Full coverage

Budget 2001

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