Project Funding for Indian Real Estate Sector to get Easier in the Future!

Project Funding for Indian Real Estate Sector to Get Easier in the Future!

Up until now, real estate project funding in India involved unfriendly norms, government restrictions, approval issues, and, above all, resistance from the conservative DNA of Indian banks to fund a project. Certainly, it was not a cakewalk for real estate developers in India until some time ago!

However, the winds seem to have been changing direction with the new government at the center, which immediately understood that the growth of the infrastructure sector was imperative for the growth of the overall economy and employment opportunities in India. Currently growing at the rate of 12-13%, the real estate sector is targeted to grow at 18-20% in the future, leading to a series of changes in norms and regulations to facilitate such growth.

Project funding regulations have witnessed some friendly steps, easing the erstwhile dreadful nightmare for most developers. Below are six broad measures that have paved the way for such changes:

1. Ease in FDI Norms

• FDI inflow in the real estate sector had been diminishing from 2011-2013, reducing from USD 3.1 billion to USD 1.2 billion annually due to stringent policies and a non-friendly framework.

• The government recently modified FDI norms to boost inflow.

• 100% FDI investment is now allowed in this sector.

• Minimum capital requirement reduced from USD 10 million to USD 5 million.

• Minimum floor area requirement reduced from 50,000 square meters to 20,000 square meters, allowing diversification in multiple smaller projects.

• Lock-in period relaxed, allowing FDIs to exit a project after three years of the last investment once the trunk infrastructure is ready.

• FDIs can transfer stakes to another non-resident company before project completion.

• These positive changes are expected to enhance FDI investments, making financing options more readily available.

2. Lowering Down of Rates

• The RBI and the government have reduced bank interest & repo rates, positively influencing real estate financing.

• The repo rate has been lowered by 25 basis points to 7.75%, enhancing liquidity and increasing lending by banks.

• More rate cuts are expected in the financial year, reducing capital costs for developers.

• Lower interest rates for home buyers will further improve liquidity for developers.

3. Long-Term Funding Instruments by Banks

• Previously, obtaining loans from banks for real estate funding was tedious, pushing developers to seek high-interest alternatives.

• The loan tenure was far shorter than the property gestation period (typically 7-8 years).

• The RBI has announced provisions for banks to issue long-term infrastructure bonds with a term of 7 years.

• Such bonds are exempt from statutory ratios like CRR and SLR, enhancing liquidity for funding.

4. Housing for All by 2022

• The government's vision of "Affordable Housing for All by 2022" is a catalyst for real estate growth, leading to easier norms and reforms.

• Rising urbanization and population growth demand the creation of 11 crore new residential units by 2022.

• The development of the DMIC corridor and 100 smart cities is further fueling the sector.

• The government is making extraordinary efforts to ensure easier financing for both borrowers and lenders.

5. Increased Allocation in Budget

• The government has emphasized real estate financing and development in the 2014-15 budget.

• Rs. 8,000 crores allocated for rural housing.

• Rs. 7,060 crores allocated for the development of 100 smart cities.

• Rs. 50,000 crores announced for rural housing development.

• Rs. 4,000 crores allocated for low-cost housing.

• The budget has been applauded for its allocations and for making foreign investments easier.

6. Changes in REIT's Framework

• Real Estate Investment Trusts (REITs) are SEBI-approved platforms allowing smaller investors to invest in commercially profitable large projects.

• SEBI approved REITs in August 2014, opening a new avenue for real estate financing and investment.

• REITs in India will primarily invest in hotels, office complexes, IT parks, malls, and healthcare centers.

• This will ease the diversification of real estate portfolios for investors and make real estate investment accessible to laymen and professionals alike.

We expect further relaxation in interest rates, FDI norms for project funding, approval guidelines, and flexibility in several norms in the near future. Things are starting to look positive, and we anticipate a radical change in how real estate project funding in India is perceived by developers due to these reforms. Such transformations were essential for India's prosperity and are, therefore, welcomed with open arms.