According to an economic survey, the FDI in construction sector fell down to 59% in the last fiscal year despite relaxation in norms. The real estate sector is facing a setback now due to the fall in the housing sales, new launches, delay in project execution and the increase of debt of the developers. The FDI in real estate in 100% subject to certain regulations. But, despite the same, the investment in real sector has plunged down. What are the issues affecting the growth of investments in real estate? The answer is approval of permits, high land registration costs and stamp duties, which are not removed despite GST, rising debt level and NPAs, lack of skilled labour force and manpower, delay in delivery of houses by the Developers and Builders. Does this mean that this is the end to the road for FDIs? The answer is no. Now the Government has woken up from its deep slumber and has taken stock of the existing mal practices in the realty sector and has introduced plethora of legislations and has brought about variety of initiatives in the Housing Sector such as Housing for All, Affordable Housing, Smart – City Project, Housing Challenge, encouragement of REITs and introduction of legislations such as RERA and Benami Transactions Prohibition Act. Therefore, the FDI in construction sector may be expected to rise in the future provided there is a regulatory framework and that the same is strictly adhered to.
Crowdfunding is the process of funding a project or a venture by raising monetary contributions from a large number of people. In other words, crowd funding is a form of alternative finance, which is most often performed by internet mediated registries. The crowd funding is of three types:
(1) Equity crowdfunding : This provides a platform and helps high net worth individuals to become partial owners in distinct properties, allowing them to participate alongside real-estate companies who acquire, redevelop, or build a particular property. In this type of crowd funding, the investors have to make a very meagre investment, do not have to manage property and at the same time are entitled to profits out of the investment.
(2) Syndicated debt crowdfunding: In this type of crowd funding, a “debt syndication” platform is employed, whereby the Investors take some or all of an existing real-estate loan, secured by a deed on the underlying property, and syndicate it out to a network of individual investors at a fixed rate of return. These loans are generally allotted to the private investors or private lenders, offering them profits ranging from 8% to 12%.
(3) Pre- filled debt crowdfunding: In this model of crowd funding, the individuals invest in a real estate backed loan, but the platform acts as the lender, doing their own due diligence and issuing a loan to the borrower, removing the middleman from the whole scheme of lending.
The Realty Sector, is currently one of the fastest growing Sectors in the crowd funding industries. In the US and other parts of the world, the funds raised could be anywhere between $50,000 to $ 3 million, from individual investors. The investor in a Crowd funding real estate sector is a high net worth individual, doctors, lawyers, business men and others. For these individuals, the real – estate crowd funding affords an opportunity to participate in a project as an owner the role that was previously tailor made for the institutional investors. Another advantage of crowd funding is that it allows the investor to select the project, in which he could invest. Does this mean that crowdfunding is more advantageous when compared to the REITs? Would this industry of Crowd funding thrive in India, given the advantages of the current crop of legislations? Would crowd funding help the current scenario in India, where the Builders are increasingly becoming bankrupt? Would there be any barriers for the foreign nationals or foreign firms to enter into the country and our realty sector through crowd funding an invest in the domestic projects?
The Real Estate PE firm’s interest in warehousing and logistics park space will rise with the roll out of GST. The logistics sector being the biggest beneficiary and real estate sector will benefit since the requirement will be to set up huge logistics and warehousing parks. With this rise in interest in the logistics sector, companies will concentrate on setting up hubs and distribution centers based on operational efficiency rather than in cheaper locations. Private equity firms are sensing better returns with lower real estate cost for setting up such warehouses and logistic parks. One country one tax model will now attract investments into logistics sector. Various taxes in different states were holding back seamless distribution of goods and related supply chain activities. Logistics and supply chain expenses can now be a value adds for manufacturers, as there will be more consolidation in the warehousing sector leading to few big players who will influence the e-commerce sector also. Supply chain efficiency is going to become the single biggest differentiator in the ecommerce space as organizations strive to make ‘same-day delivery’ a cost effective reality. The GST is going to be a game changer for the fast-growing Indian economy. Let us have a look at some other sectors as well The IT sector has different delivery centers contracting to service a single contract. With duty on manufactured goods going up from 15% to 18% there will be a rise in cost of electronic goods. FMCG companies will have substantial savings in logistics and distribution costs as there is no longer a need for multiple sales depots. GST of 19% is much lesser than the 25% tax that these companies paid as VAT, excise and entry taxes. Some of the companies that will benefit are Asian Paints, Colgate, Hindustan Unilever and GSK. There are quite a few winners; there are sectors that may be affected adversely as well. Experts predict that insurance may cost more. So will flying become more expensive.
Are the NRI’s desirous of investing in properties in India, now moved to TIER 2 and TIER 3 cities? The answer is yes, since the investment in TIER 2 and 3 cities offer higher returns when compared to TIER 1 cities, where the prices have peaked and TIER 4 cities, which is largely underdeveloped. TIER 3 cities like Nagpur are developing at a faster pace, and are giving maximum return to the investor. But isn’t our real estate economy, which is largely cash driven, now under a scanner due to demonitisation? Wouldn’t this affect the investment? Isn’t the Indian Real Estate market stagnant for the last two or three years? Would investments in TIER 2 cities like Gurgaon help boost the real estate sale and investment?