Foreign Direct Investment (FDI) as a Significant Economic Contributor
Foreign Direct Investment (FDI) plays a pivotal role in driving economic growth and is a substantial contributor to India's development goals. The real estate sector is a cornerstone of the economy, employing the second-largest number of people after agriculture and impacting 270 other sectors. Projections indicate that the sector will reach USD 1 trillion by 2030.
Regulatory Environment for FDI in Real Estate
As the real estate industry evolves, foreign investment has seen a significant increase. Certain sectors, including real estate, are restricted from receiving FDI through automatic or government-approved routes. The term 'real estate business' encompasses entities engaged or intending to engage in real estate activities, farmhouse construction, or trading in transferable development rights. Such businesses are barred from receiving FDI.
Exclusions from FDI Restrictions
However, activities such as the development of townships, construction of residential and commercial buildings, roads, and bridges, along with real estate investment trusts (REITs) governed by the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations 2014, are exempt from these restrictions. FDI is not allowed in businesses solely dealing in land or immovable property for profit.
Permitted Activities for FDI
Nonetheless, the following activities are not considered 'real estate business' and are open to FDI:
- Township development
- Construction of residential and commercial buildings
- Development of roads and bridges
- Construction of educational institutions, hospitals, hotels, and recreational facilities
- Development of city and regional-level infrastructure
- Real estate broking services
- Earning rent or income on leases of property that do not amount to transfer
Investment Channels and Conditions
Where permitted, FDI is allowed up to 100% via the automatic route. Non-residents can invest in equity shares through compulsory and mandatory convertible debentures via FDI. Foreign direct investment in an Indian company’s fully compulsory and mandatory convertible preference shares is also possible through the automatic route without government approval.
Repatriation and Lock-In Period
FDI in construction development projects through automatic means comes with certain conditions. A foreign investor may withdraw and repatriate their investment before project completion or after the development of critical infrastructure (trunk infrastructure), provided a three-year lock-in period has expired. This lock-in period does not apply to specific projects such as hotels, tourist resorts, hospitals, special economic zones, educational institutions, and old-age homes, along with non-resident Indian investments.
Compliance and Approval Requirements
All projects must adhere to applicable regulations, including land use requirements and community amenities, as laid out by the appropriate agency. The Indian company must obtain all necessary approvals from the relevant authorities and can only sell developed plots with pre-existing trunk infrastructure.
Recent FDI Trends in Real Estate
According to the Department for Promotion of Industry and Internal Trade, real estate-related activities attracted USD 4.026 billion in FDI from April to December 2023. Out of this, USD 185 million came from building townships, housing, infrastructure, and other construction projects. Real estate activities attracted USD 60.07 billion in FDI from April 2000 to December 2023, accounting for 9% of total FDI. The increase in FDI in the real estate sector is attributed to policy easing, significant growth in the property technology sector, strong demand for high-quality office space, and the emergence of alternative investment vehicles such as REITs.
Market Growth and Investor Interest
The real estate market has experienced significant growth over time. The ever-increasing urban population has fueled demand for residential and commercial development. International investors have contributed capital and introduced global best practices, enhancing the quality of planning, construction, and design. This has created a strong and resilient real estate market attracting both domestic and international investors.