The Indian Real Estate space is attracting a lot of attention from Financial Investors. This is happening primarily due to the relaxation of the FDI norms .That’s the reason we are now seeing big money flowing into the Indian real estate sector.

Foreign Direct Investment (FDI) in townships, housing, built-up infrastructure and construction- development projects:

With a view to catalyzing investment in townships, housing, built-up infrastructure and construction-development projects as an instrument to generate economic activity, create new employment opportunities and add to the available housing stock and built-up infrastructure, the Government has decided to allow FDI up to 100% under the automatic
route in townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure), subject to the following guidelines:

Development criteria

• Minimum 10-hectares or 25 acres area of land to be developed for serviced housing plots.
• For construction-development projects, minimum built-up area prescribed as 50,000 sq.mt.
• In case of a combination project, any one of above two conditions would suffice.

Investment conditions

• Minimum capitalization of US$ 10 million for wholly owned subsidiaries & US$ 5 million for joint ventures with Indian partners.
• Funds to be brought in within 6 months of commencement of business.
• Original investment cannot be repatriated before a period of 3 years from completion of minimum capitalization. Investor may be permitted to exit earlier with prior Government approval.
(Source: Government of India Ministry of Commerce & Industry Department of Industrial Policy & Promotion SIA Press Note 2 (2005 series) dated March 3, 2005)

Due to the revision of the FDI guidelines a large number of Private equity funds as well as International construction companies have started investing in the space.

Investments in the real estate space is done at two levels

1. Enterprise level investments wherein the investor invests into the company which develops individual projects and the investor shares into the profits made by the company.
2. SPV or project level investments wherein the investor invests into individual projects through an SPV formed for this purpose and land acquired for the project is taken into the SPV for development.
In both the cases foreign investors can only invest into the project if the project is FDI compliant i.e. conforming to the norms mentioned above. If the project is Non-FDI then foreign investors will not be able to invest into the project though domestic investors can still invest.

Modes of investment are discussed in detail as follows:

1. Enterprise level investments: In this case the investor invests into the company thus taking a certain equity stake into the holding company into which all individual projects are developed. The funds invested by the investor are thus deployed into various projects and the investor gets to share into the profits made by all the projects developed by the company.
An example of this is the recent investment into Oberoi Constructions wherein Morgan Stanley invested US$ 152mn into the company for a 10 % stake in the same. In this case the exit route for the investor can come in the form of an IPO in the case of unlisted companies.

2. Project specific of SPV level investments: In the case of SPV level investments the investor invests into a particular project and the investors risk as well as returns are linked only to that project. For the purposes of determining the valuations the Net Present Value of the future cash flows likely to accrue from the project are determined and depending upon the funds to be invested by the investor as well as the stage at which the investor would invest the profit sharing ratio is determined. Thus in a very early stage investment wherein the investor
invests into the acquisition of land, the investor would expect a slightly higher profit share as the risks are proportionately higher. The investor normally expects a certain hurdle rate i.e. a minimum IRR which is essentially to protect his investments. Once the investors hurdle rate is achieved the developer gets a slightly higher sharing than at the beginning of the project. Thus the sooner the hurdle rate is achieved a higher profit sharing is passed on to the developer which acts as an incentive to the developer to expedite the activity.

Thus for e.g. if an investor invests Rs 60 crores and the developer invests Rs 40 crores which is used for land acquisition i.e. an investment of 60% by the investor and 40% by the developer and the profit sharing is done in the same ratio.

Coming to what the investor would look at while investing into a project, the investor looks at the following parameters.

1. The background of the developer in terms of projects already executed
2. The capabilities of the developer in executing the project
3. The location and type of the land
4. The stage of land acquisition & the clearances which would be required and timeline for the same
5. The property prices and demand for property prevailing in the area.
6. The timeline for project completion
7. The type of proposed i.e. whether Residential, Commercial, IT Park or mixed development
8. The Costs and revenues comparison for the project and the profits likely to accrue from the project.
9. The profit sharing ratio between the investor and the developer

An assessment of these factors would form the basis of the investing decision taken by the investor.

J.K.Patil and associates,Pune /Mumbai In the case of SPV level investments the investor invests into a particular project and the investors risk as well as returns are linked only to that project. For the purposes of determining the valuations the Net Present Value of the future cash flows likely to accrue from the project are determined and depending upon the funds to be invested by the investor as well as the stage at which the investor would invest the profit sharing ratio is determined. Thus in a very early stage investment wherein the investor
invests into the acquisition of land, the investor would expect a slightly higher profit share as the risks are proportionately higher. The investor normally expects a certain hurdle rate i.e. a minimum IRR which is essentially to protect his investments. Once the investors hurdle rate is achieved the developer gets a slightly higher sharing than at the beginning of the project. Thus the sooner the hurdle rate is achieved a higher profit sharing is passed on to the developer which acts as an incentive to the developer to expedite the activity.

Thus for e.g. if an investor invests Rs 60 crores and the developer invests Rs 40 crores which is used for land acquisition i.e. an investment of 60% by the investor and 40% by the developer and the profit sharing is done in the same ratio.

Coming to what the investor would look at while investing into a project, the investor looks at the following parameters.

1. The background of the developer in terms of projects already executed
2. The capabilities of the developer in executing the project
3. The location and type of the land
4. The stage of land acquisition & the clearances which would be required and timeline for the same
5. The property prices and demand for property prevailing in the area.
6. The timeline for project completion
7. The type of proposed i.e. whether Residential, Commercial, IT Park or mixed development
8. The Costs and revenues comparison for the project and the profits likely to accrue from the project.
9. The profit sharing ratio between the investor and the developer

An assessment of these factors would form the basis of the investing decision taken by the investor.

J.K.Patil and associates,Pune /Mumbai
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