The year 2016 has been an interesting year for real estate. If we look back at what all happened, one thing is sure that it has set a stage for organized real estate show in the coming years. The last 2 years have been more of a painful years for the sector, but it taught the developers a good lesson of now focusing on project execution and delivery. The investor driven real estate market has now become a end-user driven market and we are hopeful that the year 2017 will start well and gradually move towards better home sales and fresh launches.
We are now in a position to unlock the huge potential, all thanks to the recent reforms in the real estate sector. Not only the investments have become more lucrative, decisions like passage of the real estate bill have given a hope to look forward a higher transparency and ease of doing business. The stage for NRIs and other FDI’s towards Indian real estate is also set. The permission to NRI investors to have their investments into domestic AIF (Alternate Investment Funds), has increased the access and availability of foreign capital. It is a good time for offshore investors, especially NRIs to invest in Indian real estate. If we look at the figures of last private equity of aound $4.5 - 5 billion was into the real estate.
Ever since the Government of India began relaxing regulations to attract foreign investments in the Indian real estate sector, there has been rise of a lot of additional services like advising NRI’s in setting up real estate funds, advising them on the Indian tax, corporate and exchange control implications, legal and tax structuring, documentation, etc. Offshore fund-raising in real estate has always taken time as it entails a long procedure and the current fund-raising environment is quite tough. Even as on date, though the offshore real estate funds present a rather optimistic picture, but they still remain in wait and watch mode for the next quarter or two. Lets look at the 3 major drivers for the offshore funds in real estate:
The Real Estate Regulation Act, which is scheduled to be effective in most states from March 2017. With 70% of the revenues escrowed for development costs and the requirement to complete the construction in a time bound manner, there is assurance on usage of proceeds and timely delivery. Though standard investor protections like step in rights and enforcement of security interests could now be called into question (since any change in the 'promoter' or developer will require prior approval of 2/3 allottees and the regulator), offshore funds tend to respect the discipline that RERA seeks to bring in.
The routes for foreign investment in real estate companies have been substantially liberalised. On the one hand, almost all sectoral restrictions for foreign direct investments have been relaxed. On the other hand, substantial relaxations for raising foreign debt have also been provided for. Indian real estate companies that hesitated listing their securities can now raise foreign debt by issuing unlisted debentures to foreign portfolio investors. Offshore funds get tax optimised redeemable instruments with security interests without any coupon restrictions.
In conclusion, such regulatory changes will streamline the market to large and serious players. It's wait and watch for the next few months, but India is slowly climbing up the ladder of priority in the list of global private equity funds.