 "Two graphs explain why govt is making it easier for FDI to enter realty")
The real estate sector got a boost from the government yesterday, and not a small one at that.
In a late evening press release yesterday, the government said its has eased the norms that govern foreign fund inflow into the sector, which has been experiencing a severe drought in funds.
According to the release, the move is aimed at boosting the economy as greater fund flows into real estate will result in construction of infrastructure facilities and creation of jobs.
“…In order to step up investment in construction development with its backward and forward linkages for many other sectors of the economy, it is felt that some liberalization and rationalization of the FDI policy on construction development could be the necessary catalyst to give a boost to the sector,” the release said.
True, over the last 4-5 years, the Indian real estate sector has been in shambles. Right after the big economies were humbled by the global financial crisis, Indian realtors took on huge debts, diversified into new sectors, and continued their construction spree.
Real estate prices also witnessed an unprecedented increase as investors flocked to buy, attracted by the mouth watering returns they got during the boom in the pre-crisis years. What further increased the attractiveness of the real estate was the spiralling domestic inflation. As inflation went up, investors shunned financial instruments and lapped up real assets like property and gold. Investment demand pushed already high prices further higher, deterring genuine buyers.
High interest rates, continuing economic uncertainty after the global financial crisis and a slew of scams that precipitated a domestic political crisis also added to the common man’s reluctance to buy houses.
To top it all, foreign investors started pulling out. That dealt a body blow to the real estate companies which were already witnessing declining sales and increased customer ire over delayed deliveries.
Here’s a set of graphics that shows how foreign money in real estate moved from 2007 to 2014 (until August). The first shows the dipping trend of FDI in realty and the second shows the absolute numbers at the heart of it:
The sector got the most FDI in 2009-10 at Rs 5,787 crore, that was 22.4 percent of the total FDI flow the country got that year.
From 2006-07 to 2009-10 the FDI flow into the sector witnessed a rising trend. As per the data, in 2010-11, the foreign investment in the sector witnessed a sharp 71 percent fall to Rs 1,663 crore from Rs 5,787 crore the year earlier. Then on, it has been a downhill drive.
In 2014-15 until August, the foreign fund flow stood at Rs 2666 crore, down 25 percent from the year-ago figure of Rs 3,563 crore.
What Prime Minister Narendra Modi is trying to do now is to revive the next cycle of FDI flow into the real estate sector. Will he succeed? Only time will tell.
Data analysis by Kishor Kadam
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