India’s real estate sector – current trends

Dec 14, 2015


The real estate sector in India forms a critical component of the Indian economy and contributes 5-6% to the GDP. Although this sector has stagnated over the last couple of years, it has started to show a turnaround, and growth is expected on the back of a rising economy.  In terms of foreign direct investment (“FDI”), the construction development sector has been the second highest recipient of FDI this year, which also suggests renewed investor confidence in the Modi government’s reforms.

This note briefly discusses the opportunities in this sector, the current foreign investment regime and issues that investors should keep in mind.


The residential housing segment occupies a lion’s share of the real estate market in India.  Due to factors such as an increase in the number of nuclear families, urbanization, a burgeoning young population and rising income levels, the housing sector is expected to grow considerably over the next few decades.

While the Union Budget of 2015 did not stipulate any direct measures to boost the housing sector, government initiatives such as the declaration of one hundred (100) smart cities and housing for all by 2020 have been welcomed.  Further, the recent FDI reforms eliminating the minimum area requirement for FDI projects will increase FDI in affordable housing projects.  Additionally, mid-income and luxury housing are also slated to grow in the next ten (10) to fifteen (15) years.

Commercial Real Estate

The commercial real estate market, which includes office, retail and industrial space, has witnessed significant demand in the last couple of years due to the growing IT and banking industry.  Owing to increasing consumerism, the organized retail sector has been growing by approximately 25-30% annually and is estimated to grow at a compounded annual growth rate of approximately 8%. Although e-commerce may pose a threat to brick and mortar retailers, thus far, this has not affected the rental values of retail space.  As per press reports, a number of global players have expressed interest in the Indian retail estate sector and are in talks to acquire retail space.


India is being viewed as one of the fastest growing travel markets in the world by potential hoteliers. The government has been proactive in its initiatives to boost the tourism sector.  For instance, the government has proposed the development of heritage cities by virtue of the recently introduced Heritage City Development and Augmentation Yojana (HRIDAY). Further, out of the proposed one hundred (100) smart cities, around eighteen (18) are expected to be cultural and tourist influenced areas.  The “Make in India” initiative of the Modi government also envisages development of the tourism and hospitality sector.

FDI Regime in the Real Estate Sector

Liberalization of the FDI regime in the construction development sector first began sometime in the year 2000, which eventually accelerated in 2005 when the Indian government allowed FDI in verticals such as, housing, townships, built-up infrastructure and construction development projects, subject to compliance of requirements like minimum capitalization, development of minimum area, etc.

Currently, 100% FDI is permitted in the construction development sector under the automatic route.  This includes development of townships, and construction of residential and commercial premises, roads, bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, and city and regional level infrastructure. Further, 100% FDI under the automatic route is permitted for operation of completed townships, malls and business centers.

Moreover, investments by NRIs (including overseas citizens of India (“OCI”)) or companies, trusts or partnership firms incorporated outside India, but owned and controlled by NRIs or OCI, made on a non-repatriation basis are considered as domestic investments.

Certain other changes have been introduced to the extant FDI policy by virtue of recently notified press notes issued by the Department of Industrial Policy and Promotion of the Ministry of Commerce in November 2015.  Now, the minimum area restriction condition (i.e., the minimum floor area of an FDI project having to be 20,000 square meters) and the minimum capitalization requirement (US$5 million required to be brought in within six (6) months from the commencement of business) have been removed.

Earlier, a foreign investor was permitted to exit a project on its completion or on the completion of its trunk infrastructure (i.e., development of roads, water supply, drainages, etc.).  Now, foreign investors will be permitted to exit and repatriate foreign investment before the completion of the project, subject to completion of a lock-in period of three (3) years calculated with reference to each tranche of foreign investment.  However, this lock-in restriction will not be applicable to hotels and tourist resorts, hospitals, Special Economic Zones, educational institutions and old age homes, as also in the case of investments by NRIs or OCI.

In addition, the transfer of shares from a non-resident to another non-resident without repatriation of investment will be permitted even before expiry of the lock-in period without any government approval.   Additionally, if a project is completed before expiry of the lock-in period, the foreign investor can exit.

It has now been clarified that “real estate business,” which means dealing in land and immovable property with a view to earning a profit (but excluding construction development projects), will not include earning of rent or income from lease of a property not amounting to “transfer.”  The term “transfer” has also been defined in the recent press notes.

Current Issues

The Indian investee company is permitted to sell only developed plots.  “Developed plots” mean plots where the trunk infrastructure (i.e., roads, water supply, street lighting, drainage and sewerage), have been made available.  At times, these last mile items take longer to build due to the inefficient operations of the local municipalities.  Moreover, obtaining licenses and permits at the municipality level has also been a cause of ire for many developers.  However, the Union Cabinet’s recent approval of the Real Estate (Regulation and Development) Bill, 2013, (which is expected to come into force in 2016) addresses some of these issues, and will provide an impetus to transparency and investment in the sector.


Construction projects are looking for a meaningful revival in terms of both, easing of the liquidity crunch and regulatory restrictions, which have been stalling development.  The recent liberalization of the FDI norms indicate a positive future for this sector, and private equity or vulture funds and real estate companies who operate in the distressed assets category have great opportunities to cut value deals.

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