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.
