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Indian construction projects set for boom after FDI rules eased

India could be set for an overseas investment boost in its construction sector following the relaxing of red tape.

The country's Cabinet has relaxed foreign direct investment (FDI) rules in the construction sector by easing the restrictions around minimum built-up areas, as well as capital requirement and exit norms.

By easing foreign investment in the construction sector and allowing inflows into projects spread over a smaller area, analysts believe it will result in more overseas players participating in the development of malls and office spaces in central Delhi and South Mumbai.

Multiple effects

Such a move had been mooted for some time as a means of "sweetening up" foreign investment, but an added bonus has been included by relaxing the rules enabling investors to exit the project and repatriate profits.

A clause has also been added that will make it mandatory for Indian companies with foreign funding to only sell developed plots - or those with trunk infrastructure including roads, water supply, street lighting, drainage and sewerage.

By far the most significant change is the overall reduction in construction and development requirements, with the minimum floor area requirement falling from 50,000 square metres to 20,000 square meters, while for serviced plots there is now no minimum land requirement, compared to the previous 100,000 square metres.

In particular, the moves are set to boost inner-city development, with the 20,000 square metre requirement allowing investment to flow into south Mumbai or central New Delhi, rather than the outskirts, as had been the case previously due to the difficulty in finding areas to develop or construct 50,000 square metres.

This formerly meant that risk profile was higher and returns were lower for foreign investors, but this will no longer be the case, analysts predict.

Greater interest

Another positive side-effect stemming from lower area requirement will be more interest in smaller towns, where the requirement for large top-of-the line office or residential complexes is currently limited.

Anshuman Magazine, CMD at real estate giant CBRE, described this decision as "a positive development".

"What we require is injection of capital for infrastructure and development. Whatever the government can do to increase capital flow in these areas will help the construction sector and the economy," he expanded.

The cabinet is hopeful that higher investment in the construction sector will increase demand in other areas of the economy and bolster simultaneous efforts, including enabling the establishment and listing of real estate investment trusts to ensure that Indian companies are not devoid of funding.

Long-term benefits

A government statement noted that investment in the construction development sector has a "multiplier effect" on the economy through infrastructure creation, as well as "substantial employment generation" across the entire job spectrum from unskilled workers to engineers, architects, and designers.

"Further, it creates demand for the products of a number of related industries including those in the manufacturing sector like cement, steel, fittings and fixtures and others," the cabinet said.

Finally, in addition to the employment and income generation potential, the government says greater investment in the sector will help to augment available housing stock, including affordable housing and built up infrastructure for different purposes, subsequently having a tangible, long-term impact on the industry and country as a whole.

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