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Financing Real Estate in India


Financing Real Estate in India

Last updated: May 11 2007
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  • Financing Real Estate in India

    Merrill Lynch has forecasts that the Indian realty sector will grow to a $90 billion industry in the next eight years.

    It’s a huge figure, that’s what Merrill Lynch forecasts that the Indian realty sector will grow to by 2015. As industry is enthusiastic about that figure, RBI has raised its voice of concern. It reasons that the portfolio inflows should confirm to the norms applicable to foreign direct investment (FDI) in the sector. Analysts feel that the central bank should revisit the FDI norms rather than curbing the portfolio inflows.
    A growing economy comes with its own burdens creating demands on infrastructure and real estate. The relevance of real estate further enhances when we look at the following statistics:
    - It is the second largest employer in India (including construction and facilities management)
    - It is linked to about 250 ancillary industries like cement, brick, steel through backward and forward linkages
    - A unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times.

    Thus, to support growth, various concessions and benefits have been given to the sector. This would help change the current contribution of housing and real estate to India’s GDP which is at 1% against 3-6% for developing countries.
    Funding can be sourced using debt, equity or a mix of both. Debt funding could be done from sources like banks, Non Banking Financial Corporations (NBFC) or via External Commercial Borrowings (ECB). Equity participation would involve investments in the firm at an entity level or project level. FDI is one of the ways of financing a firm’s projects. FDI in real estate is permitted in construction and project development related to both residential and commercial development in housing townships and commercial office space subject to certain project conditions. With yields at around 11.0% for office space, which go upto 20-25% in greenfield projects, investing in India is certainly a good option.
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