With the Cabinet approving relaxation in construction foreign direct invest (FDI) norms , Niranjan Hiranandani, MD, Hiranandani Group believes the new government seems to be walking the talk and has made way for building affordable houses. The government has also realised that the sector is cash strapped and has relaxed the FDI norms, he adds.
"This indicates that this is the first direction in the history of India where affordable housing after the dropping of 80IB by the Congress government was brought into fore," said Hiranandani.
Shishir Baijal, CMD, Knight Frank India also thinks this as a significant move by the government that would auger well for the cast starved industry.
He is confident that these relaxed FDI norms would attract capital into realty sector. With REITs coming in shortly and with the FDI being relaxed, there have been emphasis towards infrastructure and the smart cities, says Baijal.
According to Madhav Poddar, Associate Director, EY says not only will this relaxation norms bring in foreign capital into projects in tier II and tier III cities but small projects in tier I will also have access to global capital.
Below is the transcript of Niranjan Hiranandani, Shishir Baijal and Madhav Poddar's interview with Shereen Bhan on CNBC-TV18.
Q: This has been a decision that has been long pending. Finally we understand that the cabinet has decided to go ahead and relax the norms for FDI in the construction sector. What does this mean for somebody like you and what does it mean for your industry?
Hiranandani: I think it is very important to understand that when Narendra Modi sets a direction, he means business and he is going to take action where warranted and where he has set his finger on.
He has said that he is going to 25 million houses in eight years that he needs to do for India. The segment of affordable housing is important to him and he knows that the industry needs capital very badly. That is why the FDI rules relating to capital coming in for the real estate has been modified especially in the segment of affordable housing.
So, if you have 30 percent of the area for affordable housing, no conditions would apply because the three major conditions have been waived completely.
This indicates that this is the first direction in the history of India where affordable housing after the dropping of 80IB by the Congress government was brought into fore. So, up till now last couple of years there was only disincentive to make affordable housing. Taxation was painted by the same brush whether you made luxury housing or affordable housing. This is the first time where affordable housing is given a significant different colour where all the conditions have been dropped.
Secondly, also they have given an indication that FDI in respect of smaller area and even commercial, etc have been changed and those conditions though the lock-in period and other things have continued they have also reduced the areas, so people can put FDI in smaller projects and even ready built properties.
So, I think what is happened is he has started action and he has said that direction should be given for the purposes of indicating capital requirements in real estate especially in the segment of affordable housing; kudos to making a great beginning.
Q: Do you believe that we are going to see money coming in right away and also as far as the move for REITs are concerned do you believe that this will be an additional fillip as far as the move to see REITs becoming a reality is concerned?
Hiranandani: Three points; number one, nothing happens overnight. FDI cannot come tomorrow morning. You have to understand that this gives a direction, this gives an indication, an attraction. So, people will start looking at this and I think it will start getting working in about three to six months period of time.
The second issue which you have to understand is that there is a huge expectation - the gross domestic product (GDP) of the country which we have directed to increase is going to happen and hence there is going to be an improvement of the economy. This has already been indicated by the Sensex moving up.
So, as the economy starts moving up, the interest to put money through FDI route is definitely going to be looking more and more attractive. So, what you will see is a burst of investments post January-March. Probably by the Q2 of 2015 you will see investment.
Third is that the Budget will have to see a modification of the REITs regulation in terms of capital gains. What has been done is not significant enough to attract REITs investment. Arun Jaitley will definitely have to make an amendment in the Budget in respect of capital gains and the pass through in respect of the REITs. Though he has done some amendments; it is not enough.
So, we will see some movement in this direction before you actually see a burst of investment into India.
Q: The decision was pending it has finally been taken, the government has decided to relax the norms for FDI in the construction sector. How significant a move is this and what is this going to mean for the industry?
Baijal: I think it is an extremely significant move and I must congratulate the government for taking this move. It has been long pending and I think moves like this will attract FDI to come in into the sector. I think this is one of those cash burdened sectors that we have been facing. Lot of developers are having fair amount of liquidity issues. With REITs coming in shortly, with the FDI being relaxed and the emphasis towards infrastructure and the smart cities etc I think it augurs very well for the industry which has been struggling for the last few quarters.
Q: Niranjan Hiranandani was just with us a short while ago and he was talking about how he expects the money to start coming in only in the first half of next calendar year and also as far as REITs are concerned of course that issue with regards to capital gains and whether that will be sorted out or dealt with by the finance minister in the Budget on both those issues your comments?
Baijal: I agree with Hiranandani. It just gives a right signal to the market. Increasing it does take time. Even for REITs to come in by the time the first listing gets done I would still put it at 12-18 months for that to happen. For this movement to happen, for FDI to come in these do take time. It came in 2007 or 2005 when the initial FDI was allowed and we had a burst coming in. It sort of petered down there. The world is looking at what is happening, I think these things take time. I think this is the right signal to the industry that the government is giving. I think it will pick up, to me whether it is 6-8 months or 12 months is not the issue but this augurs well for the industry in the long term.
Q: A quick take from you on how significant this development is and what it is going to mean for real estate developers?
Poddar: The reduction in size from 50000 to 20000 square metre now means that foreign capital will have access to a greater number of projects which were earlier not possible. So, projects in tier II, tier III cities as well as smaller projects in tier I cities will now have access to global capital. So, that is good for the sector. The second change which I think is the minimum capitalisation coming down from USD 10 million to USD 5 million which again increases the number of projects which can access global capital.
The third change I think is that 30 percent of the project cost is incurred for low cost housing and none of the conditions apply which should spur low cost housing which was not really happening in India till now. So, all the three changes to the policy are positive. As we have been seeing with this government this is also a positive change which will attract global capital.
Q: How soon do you believe we are going to see the money coming in? The first half of the next calendar year, do you believe that that is the earliest by when we could see money coming into the sector?
Poddar: We need to wait at least till somewhere in H1 of 2015 because investors in this sector have really not had a great time till now. So, people are going to be cautious. So, the money will come in but my view is that it will be slow and steady.
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