Government’s initiative of easing foreign direct investment norms for real estate is unlikely to boost FDI in the sector in the near term, Fitch Ratings said.
“The easing of investment norms under FDI policy for the real estate sector is more of a long term story, and is unlikely to result in any immediate increase in FDI in the near term,” the ratings agency said in a statement.
The policy, which became effective from November 24, removes the earlier conditions on minimum investments of USD 5 million, minimum area norms and also eases exit options for FDI investors.
“The Indian real estate sector has been challenged by frequent delays in project completion and a long and complex approval process. The weak demand in recent times has added to the challenges.
“With these issues continuing to impact the sector, we believe that investment flows will remain slow and limited to a few selective projects in the next 12 months,” it said.
According to Fitch, investment flows in to the real estate sector have slowed down over the last 18 months.
FDI in construction-development projects fell by over 38 per cent during the year ending March 2015 to USD 758 million compared to USD 1,226 million in FY14.
FDI flow has remained weak this year with just USD 34 million of investments in April-June quarter of this fiscal.
“We expect the investments to pick up over the next 2-3 years along with the expected improvement in demand in the real estate sector.
“Also, the easier exit options allowing FDI investors to cash out after a lock-in period of three years without linking them to any execution delays and ability to invest in completed projects may improve the appetite of investors,” the agency said.
Fitch expects FDI investments to reach about USD 1.5 billion annually over the next two-three years. “The increase in FDI is likely to bring more transparency in the Indian real estate sector, while also resulting in more timely completion of projects and improved construction quality with access to better technologies,” it said.
The ratings agency also noted that the affordable housing segment has so far witnessed weak response from developers and fewer completed projects, notwithstanding the government focus and the potential for the sector to benefit from easier FDI norms.
“We do not expect meaningful foreign investment flows into this segment until investors are better able to assess the risks unique to this segment, and this will require a significant increase in the number of completed projects,” it added.
