After foreign equity, realty industry needs funding reforms

Bangalore : The government's recent policy initiative to ease foreign equity norms in construction by reducing the minimum capital requirement from $10 million to $5 million and built-up area from 50,000 sq mts to 20,000 sq mts may well provide a lifeline for fund-starved, debt-ridden property developers. Yet, more reforms to boost credit flow are needed to provide a long-term solution to the funding crisis faced by the realty industry.

This development should be seen in the context that availability of funds at a good price has been a big challenge for the real estate sector, especially as banks and other financial institutions have restricted the flow and borrowing from other sources have been expensive.

But with the new move, the cost of funds is likely to become more competitive. It will boost investor sentiment and increase investment flow by specially providing a window to those foreign developers who earlier could not invest due to higher investment cap. It will also be a boon for small- and medium-size developers to access foreign capital, as these developers holding small land parcels were not eligible for such inflows earlier.

It will also make things easier for those developers who are constrained by the non-availability of bigger land parcels and high cost of land within the city limits. The relaxation in area and capital norms will provide a fillip to small office, residential and shopping centre projects -- much in demand in Tier-II and Tier-III cities. The exemption of the projects which commit 30 percent of their total cost to affordable housing will give further boost to this segment with highest demand.

Also, the government has done away with the condition of mandatory 50 percent development in five years from the date of approval and permitted investors to exit on the completion of a project, or after three years from the date of final investment, subject to development of trunk infrastructure.

This is quite an attractive proposition for both current and future investors. The latest foreign equity reform has further improved the investor sentiment, which has been on the upswing after the installation of corporate-friendly stable government of Prime Minister Narendra Modi that has taken a number of reform initiatives.

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