February 2005

Market Research Series - India

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Foreign Investment Regulations in Real Estate

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Market Research Series - India

Indian Government undertakes deregulation of foreign investment in real estate

Continued Deregulation
In a significant development on 24th February 2005, the Central Governments Cabinet Committee on Economic Affairs, cleared a proposal for 100 per cent foreign direct investment (FDI) in construction and development projects. These proposals will now be cleared through the automatic route and will no longer have to approach the Foreign Investment Promotion Board (FIPB) for clearances. The various segments for FDI include townships, housing, built-up infrastructure and construction-development projects, (but will not be restricted to housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) in order to catalyse investment in a vital sector of the economy.

Key Features
The salient features of the proposal cleared by the government are: a) FDI would be permitted up to 100% under the automatic route under the ambit of which foreign investors would only need to intimate FIPB of their intention to invest and not seek specific approval.

b) Minimum area to be developed under each project would be: Development projects, which could be of any nature and not limited to office buildings, IT/Business parks, shopping centres, industrial/logistic and warehousing facilities, hotels and serviced apartments - Minimum built up area of 50,000 square metres. Plotted housing developments wherein only individual plots of land with support infrastructure such as roads and utility connections are sold to individual occupiers within a large development - Minimum land area of 10 hectares. In case of a project combining elements of both the above categories, the investor would be required to meet only one of the above two criteria. c) The investment would further be subject to the following conditions: Minimum capitalisation of US $10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of company commencing its business. Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the government through the Foreign Investment Promotion Board (FIPB). d) The foreign investor would not be permitted to sell or trade in undeveloped plots or raw land. Undeveloped plots will mean where roads, water supply, street lighting, drainage, sewerage, and other conveniences, have not been made available. It will be necessary that the investor provides this infrastructure and obtains the completion certificate from the concerned local body/service agency before he is allowed to dispose the plots. This measure has been provided in order to discourage foreign investment in speculative investment in trading of the land and without any development or any value addition. e) The project shall conform to the norms and standards, including land use requirements, provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State government/ municipal/local body concerned in the city. This essentially means that now State governments and municipal bodies will be approving such projects. The Central governments role would be limited to policy level issues.

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Market Research Series - India

Asset Class
Office

Previous Regime
Foreign investment not allowed in pure office developments as being different from IT and business parks. 100% foreign investment allowed in IT / Business parks approved under Industrial Parks Scheme 2002 (whereas in reality, suburban office buildings have been occupied only by IT companies or by companies engaged in back office processing activity)

February 2005 Regime

Foreign investment is allowed in city centre or suburban office buildings even if the occupiers were not classified as forming part of the IT/ Back office sector. No change

Comments
However, under the new regime, such an investment is allowed only at the construction stage and for projects of proposed built up area of a minimum of 50,000 square metres. In the previous regime, foreign investment was allowed in IT Parks at the construction stage, subject to that such parks proposed to provide space to atleast 3 tenants. Under the new regime, even facilities that are proposed to be occupied by a single tenant only are eligible for foreign investment at the construction stage but subject to a proposed minimum built up area of 50,000 square metres. Thus, foreign investors can now invest even in part of a business park or a standalone office facility dedicated to a single tenant at the construction stage, provided the proposed minimum built up area of 50,000 square metres. 100% foreign investment apart from being allowed in development of residential properties, is also allowed in development of plotted housing projects. Plotted housing projects are defined as projects wherein investor acquires raw land and provides for infrastructure (power/utilities) and further sells down individual plots within such a development to individual home owners who may develop their own houses. In order to be eligible for foreign investments, the minimum size of land for such developments should not be less than 10 hectares. The regime for hotels, resorts and serviced apartments was always opened to foreign investments. Hence February 2005 announcement has no impact on the said asset class.

IT/ Business Parks

Residential

100% foreign investment in residential asset class was allowed under the ambit of Press Note 3 (2002 Series) only in townships of a size of minimum of 100 acres planned with a minimum of 2,000 dwelling units.

100% foreign investment is allowed in any kind of residential development subject to a minimum proposed built up area of 50,000 square metres. Though such an investment needs to be greenfield in nature and not in acquisition of a developed property.

Hotels/ Serviced Apartments

100% foreign investment allowed in development or acquisition of existing assets

No change

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Market Research Series - India

Asset Class
Industrial/ Logistics/ Warehousing

Previous Regime
Framework of foreign investment by international investors (and not just international occupiers themselves) was unclear in nature.

February 2005 Regime

100% foreign investment is allowed in development of such facilities even by international investors.

Comments
However, such an investment by foreign investors would be allowed only at the construction stage, subject to a proposed minimum built up area of 50,000 square metres.

Shopping Centres/ Malls

Foreign investment was not 100% foreign investment is allowed in shopping allowed in development of centres/malls. such facilities by international investors.

However, such an investment by foreign investors would be allowed only at the construction stage, subject to a proposed minimum built up area of 50,000 square metres. It may be noted that there has been no change in the governments policy to not allow international retailing companies to establish operations in India. Previously, plotted housing projects were not eligible for foreign investment. The new regime allows foreign investment even in plotted housing projects subject to a minimum land size of 10 hectares (i.e. approximately 25 acres).

Townships

100% foreign investment 100% foreign investment allowed, under the ambit of continues to be allowed in Press Note 3 (2002 Series), townships. only in townships of a size of minimum of 100 acres planned with a minimum of 2,000 dwelling units.

Special Economic Zones (SEZ)

100% foreign investment was allowed in real estate development within SEZ projects.

100% foreign investment was allowed in real estate development within SEZ projects.

The regime for real estate components of the SEZ schemes was always open to foreign investments. The February 2005 announcement has no impact on the said asset class.

Conclusion
It is evident that the February 2005 announcements have significantly deregulated foreign investment in the Indian property markets. We believe that high levels of interest amongst cross border investors coupled with the liberalization measures would lead to significant inflows of international equity into Indian property markets at both enterprise as well as asset levels. Although government has not undertaken capital market level deregulation measures such as allowing REITs (whether domestic or foreign owned) to operate in India, recent measures in 2004 to allow international and domestic companies to operate real estate funds/pooled vehicles through private equity fund route is a step in the right direction. Some of the key foreign investments announced in the last few quarters are : Ascendas Pte, Singapore acquires 100% interest in 0.9 million square feet Vanenburg IT Park, Hyderabad. Lee Kim Tah Holdings, Singapore acquires 100 acres of land from Tamilnadu Government in Chennai to develop an integrated township. Emaar Properties, UAE and MGF Properties (a leading development company based in North India) announced a joint venture to undertake township projects across various cities in India.
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Market Research Series - India

About Jones Lang LaSalle

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