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27 February 2024

Indian realty shackled by restrictions

By Graham Norwood


When my computer falters, it is an Indian voice I hear when I telephone for help. The same applies when I call to book a flight or a hotel. And the same again if I need a telephone number and dial an enquiry service.

All that is unsurprising as India is now the global centre for back-office services of this kind, a fact that has spawned huge levels of investment in the country. But am I the only real estate commentator worried the Indian property industry is not responding as quickly as it should to the consequent economic growth?

On paper the country looks like a perfect opportunity for real estate investors. It is one of the world’s fastest growing economies (a forecast annual eight per cent growth in gross domestic product until 2012 at least); it has powerful demographics (650 million people under 30 providing a vast workforce and equally vast spending power that looks likely to resist threats of recession in the West); and an extraordinary demand (in the residential sector alone, some 19 million new homes are required by 2020).

But the real estate industry – more precisely its buildings, funding systems and regulatory framework – are not keeping up with this scale of movement. A major problem is India’s reluctance to allow the high levels of foreign investment seen in other emerging locations.

This is Shell’s take on the problem. “Prices remain high and the process of acquiring real estate is mired in red tape. Land titles tend not to be clear, leading to delays. Construction can be challenging: schedules aren’t adhered to, quality needs to be closely monitored, and safety consciousness has a long way to go.”

A bid to avoid these problems through establishing Chinese-style Special Economic Zones, with liberal development guidelines to encourage global interest, has become bogged down in micro-level protests from farmers and special interest groups. Of 500 SEZs proposed back in 2000, only 220 have been established and some of these have heavily diluted planning powers compared to promises made a decade ago.

Companies setting up business in Mumbai are now accustomed to less working space per employee than in most other international centres because of a shortage of high-quality office accommodation. Large-scale decanting of corporate buildings to lower-cost and more spacious suburbs has become commonplace.

In the residential sector, developers seeking to create an international investment image for India are hampered by legislation, which currently prohibits the purchase of any Indian real estate by anyone except resident Indian nationals (RINs), non-resident Indians (NRIs) and people of Indian origin (PIOs).

This applies in the commercial real estate sector, too, but some players have by-passed this obstacle by setting up Indian-based subsidiaries run by RINs, and buying land though these. Emaar, for example, has done this by establishing Emaar MGF, a joint venture with a Delhi-based developer, through which it will build mixed-use schemes in six Indian locations.

But in much of the residential sector – which is historically lower-funded than the commercial sector in India – things are proving more difficult for foreign investors.

There is some reliance on countries such as Britain with extensive historical links to India, and therefore a pool of NRIs and PIOs, who form consortia to invest in homes in bulk.

“There are 2.5 million British Asians and they are looking overseas for investment, often to India. With their family links they can get some of this action,” says Chantel Halai from Gujurat in north west India, and now head of the South East Asia desk of international realtor Savills. But investors from other nations find the process almost impossible and this is surely hampering India’s progression on to the real estate world stage.

Property funds, with no comparable restrictions, help to fill the investment gap to some extent.

In the past four years, it is estimated some $30 billion (Dh1.1trn) has been invested in the country’s real estate market through 150 Indian and overseas private equity funds including JP Morgan, Falcon, 3i, Blackstone and others.

But even so, India’s legendary bureaucracy and nationality-based restrictions on global investment prevent the development of the kind of real estate infrastructure that I have seen in liberalised parts of China, much of the “emerged” eastern Europe and even areas of Africa.

This is patently self-defeating for India, a country with so much potential. Without more liberal investment policies, this disadvantage is set to continue – and as a result, India does not look as good a bet as it should.
Graham norwood is property correspondent for The Observer newspaper of London.