The central government’s decision to ease the Foreign Direct Investment (FDI) will bring in much-needed capital in the cash-crunched real estate sector, but experts say instead of bring down the soaring property prices, it will further fuel the hike. According to the property experts, the FDI capital is not cheap. It comes with the highest interest rate of 20-25 per cent. “If developers take a loan to buy land at this rate, they will naturally increase the rate of apartments to recover the cost. Post FDI, the property market was driven by the end user. Now it is driven by investors,” said property researcher Pankaj Kapoor, MD of Liases Foras.
Kapoor said the FDI has been creating a vicious circle by spiking the property rates and will bring imbalance to the urban economy. “Easing FDI was good for investors but it will not solve the affordable housing problem. Rather than easing the FDI, the government should ask banks to lend to developers at a cheaper interest rate. The condition should be that the developers use this fund to start the construction immediately. They should not be allowed to sit on the land for an uncertain period, which creates shortage of houses and accumulation of unproductive assets,” he added.
Gulam Zia, Executive Director of the Knight Frank India Pvt Ltd, said the real estate sector is going through a bad phase from the last three consecutive festive seasons. “The festive season failed to bring cheer to the developers. As a consequence, fund raising has become the top most priority for them. FDI will be a major source of capital infusion for them. This policy shift, however, will not have a significant impact in the short run, for instance in relaxation in project size,” he said.
“Without the consumer’s interest, no amount of changes in policy decision will have an impact on attracting the foreign investment into Indian realty,” he added. Anshuman Magazine, Chairman and MD of CBRE South Asia Pvt Ltd, said this structural reform by the government was an extremely welcome move. “With relaxation in minimum capitalisation, area and exit norms, we hope that more foreign capital will enter India’s realty sector, particularly residential projects. This is likely to provide the much-needed push to rejuvenate growth in the sector,” he said.
Developers, however, have a different view. Anand Gupta of the Builders Association of India said the FDI easing will have a positive impact on the property sector. “There will be an easy flow of money at a cheaper interest rate. Almost 70 per cent of the project cost goes in buying land in Mumbai. Once we are able to buy land at a reasonable rate with easy money, it will also cut down the property prices in the long run. It will, however, take a year to see the results on ground,” said Gupta.