RBI Cautions Real Estate India

Monday, January 29, 2007

In a move to protect the Indian real estate market, the Reserve
Bank of India has indicated its reservations on external commercial
borrowings (ECB) in realty projects involving integrated townships
of 25 acres. The Department of Industrial Policy and Promotion had
earlier permitted FDI in March 2005 in real estate in projects of
a minimum area of 25 acres.

However, this decision comes even 18 months after the finance ministry
then approved of ECB. The RBI fears that uncontrolled borrowing
from these sources at low interest rates would cause a spiraling
effect in the property market.

Borrowings by the commercial real estate market in India have crossed
100%, and the RBI has advised a check on uncontrolled growth, by
restricting money flow from FDI and FIIs into real estate. Presently,
India permits FDI in real estate, but not institutional investment.
Similarly, foreign venture capital investors (FVCI) in Indian realty
have also been withheld. FDI investment in realty was $2 billion
in September 2006, but in 2007, trends are indicating an increase
by $6 billion. Debts could however rise to $12 billion.

With Special Economic Zones (SEZs) a key focus area for real estate
builders, the RBI has classified these as commercial real estate.
This precautionary measure is also directed to protect property
prices.

External commercial borrowings in projects of 100 acres or more
are being currently permitted by the RBI, but the funds are not
allowed for investment in acquiring land, which actually forms the
lion’s share of the capital investment in a project.

Investment in Indian real estate is far more profitable than in
other nations, and uncontrolled investing by speculators is giving
rise to fears of a bubble which could de-stabilize the economy in
the long run. The RBI’s restraining arm would well protect an unwary
investor.