The launch of Pradhan Mantri Awas Yojana – a government scheme targeting housing for all by 2022 – has led to a shift of focus from the luxury segment to affordable housing. Other factors which have contributed to the shift include a general real estate slowdown, increase of developers’ overall debt burden, delays in delivery of earlier luxury segment projects and demonetization.
The policy focus on housing for all also led to a slew of regulatory relaxations, resulting in the recent trend of pouring of foreign funding into developers targeting lower income groups. Until late 2015, while 100% foreign direct investment (FDI) was permitted under the automatic route into construction and development projects, stringent conditions were imposed, such as minimum thresholds (in terms of floor area and amount of investment) and restrictions on exit of investors (even in the case of transfer to a non-resident, where no repatriation was involved). Such conditions deterred foreign investment in new and smaller projects.
These restrictions were removed and foreign investors were permitted to exit (subject to a lock-in period) via press note 12 of 2015. This provided adequate impetus for achieving the government’s target of housing for all by 2022, as any project irrespective of its size can now have access to FDI. In addition to kick-starting new smaller projects, this policy change could also result in the revival and accelerated development of stagnant projects.
The above-mentioned changes are also projected to considerably reduce the cost of funds for builders, leading to lower prices for buyers. Further, easy access to funds is expected to increase the liquidity of cash-strapped developers and enable them to complete projects on time and avoid cost appreciation due to delays.
The 2015 press note also clarified that 100% FDI under the automatic route is permitted in completed projects for operation and management of townships, malls etc., and that earning of rent and other income on lease of the property (not amounting to transfer) does not amount to “real estate business” (which is prohibited sector for receiving FDI). Hence, FDI would also be permitted in completed projects earning rental income.
These relaxations, while not directly impacting affordable housing, led to increased activity and equity interest in this sector. Then, early this year, it was clarified that a “real estate broking service” will not be viewed as “real estate business”, thus permitting 100% FDI under the automatic route for real estate broking services. This should enable brokerage companies to access foreign investment and bring an organized structure and overall transparency to the market.
However, a major factor in the success of affordable housing projects is the availability of adequate financing sources for potential buyers. While traditionally banks have been the key player in the housing finance market, microfinance institutions have started playing a sizeable role in this segment, given their focus on financing lower income segments. Accordingly, many developers of affordable housing projects are now partnering with housing finance companies.
The FDI policy earlier prescribed certain minimum capitalization norms for non-banking financial companies (NBFCs), including housing finance companies. Changes to the FDI regime for NBFCs in 2016 included: (i) 100% FDI under the automatic route was allowed in any activity regulated by a financial sector regulator (such as the National Housing Bank); and (ii) common minimum capitalization norms were removed (though norms stipulated by the specific financial sector regulator would still be applicable). The government, however, clarified in April this year that to the extent that financial activities are not regulated by any financial sector regulator (including where the entity is not registered, is exempt from registration, partly regulated, or where there is a doubt regarding regulatory oversight), a minimum FDI requirement of US$20 million applies on fund-based activities (including housing finance).
The regulatory changes described above have stimulated foreign investment in affordable housing. Recent recipients of foreign infusions include Signature Global’s affordable housing project in Gurugram, Bhartiya City Developers, Arthveda Fund Management, Prince Foundations, Aptus Value Housing Finance Company, Shubham Housing Development Finance, etc. Given the continuing significant gap in supply and demand in this segment, the affordable housing and housing finance sectors seem set to grow in leaps and bounds over the next few years.
Vishwanath Pratap Singh is a partner and Srabanee Ghosh is an associate at Luthra & Luthra Law Offices. The views expressed here are personal. They are intended for general information purposes and are not a substitute for legal advice.
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