The real estate sector is one of the most recognised sectors worldwide from an investment standpoint and primarily consists of four sub-sectors – residential, commercial, hospitality and retail. In India, the real estate sector is considered to be the backbone of the economy and is the second largest employment generator after agriculture, with a multiplier effect on 270 allied industries. In 2021, the size of the Indian real estate sector was US$ 200 billion and is expected to increase to US$ 1 trillion in 2030.

Whilst the industry continues to undergo several changes, a key development witnessed by the real estate sector in recent times is a significant increase in foreign investment. According to a Colliers – FCCI report[1], foreign capital inflows into the Indian real estate market jumped three-fold to $ 23.9 billion during the 2017-21 period when compared with the previous five years. The report further mentions that the share of foreign investments in Indian real estate grew to 82 per cent during 2017-2021, compared with 37 per cent in the preceding five-year period.

Reasons for increase in foreign investment

The influx of foreign investment into Indian real estate can be attributed to various factors:

• Strong demand for Grade A office space – several multinational brands and major Indian corporates and brands setting up headquarters in the business centres of key Indian cities, following increased confidence among investors as a result of drastic improvement in India’s ease of doing business ranking[2], are driving up demand for state-of-the-art office space.
• Relaxation of FDI policy – whilst 100% foreign direct investment in townships, housing and built-up infrastructure has been permitted since 2005, the Government of India in 2014 reduced the minimum built up area and capital requirements and eased exit norms for foreign investment in the construction sector.
• Large influx in the ‘prop-tech space’ – an increase in momentum in the industrial and logistics asset segment, propelled by strong demand for warehousing spaces by e-commerce and 3PL (third party logistics) firms, resulted in industrial and logistics assets garnering almost a third of foreign investments (USD1.1 bn) in the real estate sector in 2021.
• Alternative investment vehicles such as REITs - Real Estate Investment Trusts (REITs) offer a host of potential comforts to foreign investors such as low risk, good capital appreciation opportunities, regular income and easy exit routes (it is mandatory for REITs in India to be listed on a recognised stock exchange). Whilst REITs are still a relatively new investment medium in Indian real estate (Embassy Office Parks, the first Indian REIT, was only issued in March 2019), the success witnessed by the existing REITs has resulted in optimism about expansion of the Indian REIT market.

Challenges faced by foreign investors

Whilst there are many attractions drawing foreign investors to Indian realty, the sector is in fact highly regulated and consequently poses a unique set of challenges:

• Regulatory issues – there are numerous approvals that need to be obtained from various statutory and governmental bodies prior to the commencement of any real estate project, and due to lack of a single-window clearance system, such projects often face a long gestation period. Further, real estate in India is a ‘state specific’ subject, with the rules and regulations to be complied with, and approvals to be obtained, varying across states. Language barriers are also a potential issue as official property documents and records are often in regional languages and can require translation.
• Litigation risk – the current land and property title system in India is presumptive rather than conclusive, which results in a lack of transparency. Thorough legal due diligence is required in multiple registries to clarify the chain of title of property, and local authorities often either do not hold, or hold illegible or incomplete previous title documents due to poor data management and lack of technology utilisation. As a result, projects are often commenced without a crystal-clear vision of title, risking litigation at any stage. Such litigation can take years to resolve and endangers the returns for investors.
• Frequent changes in legislation – laws and regulations affecting real estate in India change frequently, with existing federal/state legislation being updated and new legislation being introduced regularly to provide for the continuous evolution of the Indian real estate sector. Case law is also of significance and has the potential to overturn well-established principles and/or practices. Further, the executive branch can exercise its powers to frame subordinate legislation. It is therefore critical that the parties involved in a real estate project source (circulars issued by government bodies are often not easily available to the public and may need to be obtained directly from the issuing authority) and familiarise themselves with the latest relevant legislation.
• Taxation regime and outward remittance – there are various entry routes available to foreign investors, including the Foreign Venture Capital Investor (FVCI), Foreign Direct Investment (FDI), Non-Convertible Debentures (NCD) and External Commercial Borrowing (ECB) routes, along with non-convertible debentures. Investing through such routes requires adherence to various federal legislation and regulations, including the Foreign Direct Investment (FDI) Policy and Foreign Exchange Management Act, 1999, which also governs outward remittance at the end of such investment. The complex taxation regime in India, which involves taxes such as stamp duty and GST, must also be complied with to avoid penalties being incurred.

Key takeaways

Foreign investors considering investment in real estate projects in India should acquaint themselves with the distinct aspects and nuances of the sector to ensure they receive the returns anticipated. That said, Indian real estate is likely to continue being an increasingly desirable investment opportunity for many reasons, including the Government of India’s strong focus and heavy investment into the improvement of infrastructure, which is likely have a multiplier effect on the real estate industry and present potential opportunities for development, the increasing ease of low-risk investment through mediums such as REITs, and the introduction of legislation such as the Real Estate (Regulation and Development) Act, 2016, which is known to have instilled a larger degree of transparency and accountability in the industry. Today, there are a number of prominent Indian developers who are backed by international investors and this trend of foreign investment is only expected to continue.

Author: Ashwin Mehta (Associate)

[1] ‘Foreign investments in Indian real estate turn a corner’ issued by Colliers-FCCI dated March 2022.

[2] As per the World Bank’s Doing Business database, India entered the top 100 in 2017 and ranked 63rd in 2019