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FDI change breeds optimism in India building sector

India's building sector has reacted positively to the news that the country is to relax foreign direct investment (FDI) rules in the construction sector.

After the Cabinet revealed that it would be easing the restrictions around minimum built-up areas, as well as capital requirement and exit norms in the country, the real estate sector has expressed its happiness at the removal of boundaries that had previously proven to be a significant obstacle to expansion.

It is hoped that making it easier for foreign investment to occur in the construction sector and allowing inflows into projects spread over a smaller area will persuade more major international investors to develop new buildings across the country - something unanimously welcomed by the liquidity-starved sector.

Apt timing

It is particularly welcome after it was revealed that India’s construction, housing and real estate segments’ share in total FDI fell from five per cent in 2013 to less than three per cent as of August this year.

Figures published by real estate consultancy JLL India indicate that the sector's share has been consistently falling over the last six years since 2009-10, when it stood at over 20 per cent, and so the new announcement arguably could not have been made at a better time.

Anuj Puri, Chairman & Country Head at JLL India, said the easier rules will help faster completion of projects delayed by a squeeze on funds due to elevated debt levels.

Broad effects

This view was shared by LK Jain, President of the Confederation of Real Estate Developers’ Associations of India (CREDAI), who described it as "a good step" from a broader policy perspective.

"It will boost large scale investment in the sector and funds can also be invested in projects in suburban areas and smaller cities. Smaller projects too can also attract FDI and FDI inflows could go up three times in the next two years," he added.

More work needs to be done to ensure that the Indian building sector can regain and maintain its competitiveness, however, with Mr Jain noting that interest rates still need to moderate.

Analysts feel that although more funds being channeled into the sector will lead to greater supply, this could only lead to more pricing pressure and lower margins for investors unless demand picks up.

If the government addresses the demand side of the equation, India may then see the flood of investment these new changes are designed to attract.

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