After Foreign Equity, Realty Industry Needs Funding Reforms

Notwithstanding all this interest of foreign investors in Indian real estate, the big question is if the foreign equity alone is the answer to massive funding requirement? Considering the current shortage of 19 million homes -- and to achieve the goal of housing for all by 2022 -- one needs close to 16.5 trillion ($275 billion) per year for the next eight years, whereas currently housing development is getting less than 8 trillion ($135 billion) of annual investment.

The challenge becomes all the more enormous as the real estate sector has been facing a crisis on household savings, equity funding and bank credit -- the three main sources of real estate funding. Industry statistics reveal that close to $1 trillion was invested in the real estate sector between 2008 and 2014 and 72 percent of this funding was met by household savings that have now considerably gone down.

Equity market and private equity funding which accounted for 10 percent in 2008 has now halved. Even though real estate gets less than four percent of total bank advances, the Reserve Bank of India has raised concern over real estate exposure, up from 600 billion ($10 billion) in 2007-08 to 1,540 billion ($25 billion), and housing exposure, up from 2,600 billion ($43 billion) to 5,400 billion ($90 billion).

What is really reassuring is that the investment bucket is getting enlarged with large sovereign wealth funds and pension funds coming forward. But considering the enormity of the challenge, we need a lot more reform measures to boost funding. This includes widening the external commercial borrowing window by upping the $1 billion limit.

One is hopeful the government, which is reviewing foreign investment policies for limited liability partnerships, will soon lift curbs and provide automatic access to foreign investors via these entities in sectors like real estate where 100 percent foreign equity is permitted. The newer emerging investment vehicle of commercial mortgage-based securities also holds promise.

As home loan is a key to housing growth, the government is undertaking positive policy initiatives in this regard. It has already increased the home loan entitlement from 80-90 percent of property value and now it is planning to hike interest subsidy for low cost housing to five percent, besides lowering the interest rates.

By proposing to bring in amended Land Acquisition Act and Real Estate Regulatory Bill in the upcoming winter session of Parliament, the government will be further making the investment environment conducive for investors by cutting down delays in land acquisitions and building approvals and by making the real estate transactions more transparent.
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