Indian real estate is back on foreign portfolio investors (FPIs) radar
According to brokerage firm Edelweiss Securities, foreign portfolio investors (FPIs) parked a multi-month high of $497 million, in Indian Real Estate, in March 2021(1) – which is almost 35% of the total deployment in the sector. With the US administration led by President Biden announcing a USD 1.9 trillion pandemic relief package, the financial markets are flush with liquidity and looking for opportunities around the globe. Although markets around the world are treading cautiously, due to inflation fears, and most Asian and emerging markets are witnessing FPI outflows, India has emerged as the exception.
To a large extent, FPIs favouring Indian real estate can be traced back to the Finance Ministry, of the Government of India, proposing amendments to the Finance Bill, in February 2021. The reforms permit FPIs to debt finance Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs). The step was taken to increase the available funds for infrastructure and real estate development in India – which are central focus areas in the Indian government’s plans for the country – and it appears to be bearing fruit.
Putting real estate at the center of development
It’s interesting to note that these recent initiatives are targeting a concurrent surge of growth in both infrastructure and real estate. Development of state of the art infrastructure – especially connectivity, such as highways, access controlled expressways, and metro-rail projects – expands the urban footprint, and allows the real estate industry to develop the outskirts of cities rapidly. This effectively lowers land acquisition costs for real estate developers, allowing them to attract buyers with a greater variety of budgets, and creates value appreciation of completed projects, driving greater profits for the industry.
The Budget 2021(2) issued by the Government of India also extended the tax exemption benefit, and deduction of interest on loans for affordable housing, until March 31, 2022, as well as providing tax exemption for notified Affordable Rental Housing Projects. The Indian real estate developer community is currently lobbying the government to expand the definition of affordable housing, to include properties worth up to Rs 85 lakh.
Apart from allowing the entry of FPIs into debt financing of REITs and InvITs, these investment vehicles have also been exempted from tax deducted at source (TDS), which has made REITs more
lucrative investment for individual investors, further empowering the growth of the real estate sector, with a strong influx of funds.
Leveraging India’s ‘demographic dividend’
As a country India has one of the youngest populations overall, in the world. This is in stark contrast to the rest of the world, which is rapidly ageing. A little less than 90% of India’s population is currently below the age of 60, and just about 35% of its population is under 19 years old.
This youthful population ensures a steady supply of workers, earners, and first home buyers, which will keep India’s real estate sector growing for a few decades. Experts also expect a huge turnover of current properties, as urban and rural rejuvenation projects, and growing per capita income, combine to unlock another huge avenue of demand for the industry.
With the positives lining up, and reforms related to real estate favouring investors – both individual and institutional – the Indian real estate sector is now well-positioned to make its long-awaited leap forward.