May 15, 2001

There do seem to be some takers for foreign direct investment (FDI) in India's real estate sector. Cent per cent FDI has been allowed for the development of townships and building materials and 51 per cent FDI in industrial and commercial projects.

It is mainly township development that foreign players are interested in. The Singapore-based Jurong Township Development, Bovis Lendlease, Malaysia-based Renong and US-based Cramelcrow and Bechtel Corporation are said to be interested.

The Indian real estate sector has welcomed the FDI move as they see an opportunity to develop townships in India together with the foreign entrants. Among such hopefuls are the Ansals group and Unitech Ltd.

The view emerging from Unitech is that more funds will now flow into the sector and the housing problem of the country would be solved. Concurs Surendra Hiranandani, partner at Hiranandani Developers & Builders: ""FDI will prove very useful to develop new townships for the growing population."

He also felt that foreign competition would shorten the gestation period for construction work here. Currently, there are long spells of no work in the Indian construction industry. Interestingly, the real estate sector had not reposed much hope in FDI when the guidelines were first announced, with experts opining that not many foreign firms would bite the bait.

"The returns on investment for the foreign players may not be sufficiently attractive. Returns on retail and commercial projects in the US and Europe are much higher than foreign players can earn in India," Tariq Vaidya, the head of advisory services at Knight Frank, had said at the time.

It was also felt that currency devaluation would skew returns targets. Infrastructure bottlenecks, lack of transparency in the sector, the absence of effective labour laws, lack of consistent real estate laws and taxation rates all over India, were seen as big roadblocks. Some problems might still stymie foreign investment. According to the Ansals, many restrictive laws still need to be restructured. Such laws have already curbed NRI investment into the sector.

But the reason that foreign companies are now interested in the Indian real estate sector seems to be that there is oversupply of housing in countries like Japan, facing recession for many years now, say experts. Companies in countries like Singapore, Malaysia and Thailand too might invest in India for similar reasons.

A study by real estate consultant JLL ranks India 44th amongst 50 countries in the country risk score. But in the same breath it says that the fact that high risk is associated with higher returns could prompt some players to invest in India. The consultant added that a couple of townships have been planned in Bangalore by non-resident Indians, which may be implemented now.