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The
'Capital Tourist'
& his aversion to hush money
By Umesh Luthria
Some two years back, the Government
of India announced the Foreign Direct
Investment policy in the real estate
sector. Since then, the country has
seen quite a few foreign investment
entities setting up shop in India
with a keen interest in the real estate
space. Labeled by their local counterparts
as the “Capital Tourist”,
what are they really here for? To
claim their fair share in a real estate
market that is projecting a need for
48 million rural and urban homes requiring
an investment of about US$ 21 billion
or more? Or, are they here to participate
in the retail, commercial and hospitality
boom that seems to have lit up the
economy? Or, honestly, are they here
to just chase the high double-digit
returns on their money as compared
to the pale 10 percent or less returns
being offered in developed countries?
With the real estate sector now slated
at over US$ 12 billion contributing
about 14 percent to the Gross Domestic
Product (GDP) and promising to grow
at an average of 14.6 percent there
is a mix of euphoria and fear and
the larger question being asked is
if this boom is for real or is it
just a bubble created by the presence
of this “Capital Tourist”
that is touring around the country
for deals with his money bags in tow?
The India GRI2006 meet organized by
the Global Real Estate Institute on
the 13th and 14th of November 2006
promised to be the kind of event where
such questions and more would find
the answers. The attendee list included
the top echelon of virtually every
major player in the Indian real estate
industry be it developers, contractors,
foreign and local funds and banks,
sector consultants and specialists
which made for excellent networking.
First of all, what I really liked
about the initiative was that it was
not all about listening to speakers
flashing their pre-prepared power
point presentations. Rather, it was
a series of some serious group discussions
on various topics concerning the FDI
policy, legal and regulatory framework,
investment opportunities, the do's
and don'ts, expectations, etc., each
discussion was guided by a group of
eminent expert panelists.
Issues Concerning FDI
The first question that got the summit
going was “International Investors
in India nuisance or opportunity?”
Prices around the country for real
estate are defying gravity and what
was considered plain logic; and each
day a new deal is heard off that makes
the previous one look small and in
hindsight logical. But, most of these
deals are being done by local players
with little help from the international
investors. The foreign investors in
fact, are not a happy lot. They feel
that the FDI policy has been drafted
with an objective to see that foreign
money goes into developing large projects
and integrated townships in the new
developing urban areas that do not
offer spectacular returns like the
already established metros. The policy
norms ensure that they (foreign investors)
cannot invest in even strategic ready
prime properties at key locations.
Moreover, the land acquisition laws,
permissions for development, and other
related laws are clearly not conducive
for them to go it alone. Looking for
partners with integrity and experience
is more an exception than a rule.
Then, the partner is also looking
at profiting immediately from the
partnership by bring in land at market
value to the joint venture rather
than at a sensible profit; and, above
that insist on holding the majority
in the project.
Then, while bringing money into the
country is relatively easy, taking
it out is nearly impossible as at
the moment the financial markets are
not geared to real estate related
public offerings and the deal sizes
are too large for refinance by most
local institutions. Exit is made tougher
by the fact that local partners may
not share the same exit strategy (as
they hold the majority) and the contract
laws are not capable of offering swift
and equitable justice. Many feel that
partnerships with the Government and
semi-government agencies for land
development are also not feasible
as these bodies are only interested
in profiting from offering the land
without the required and promised
clearances. Corruption is another
issue dogging these investors with
many in agreement that they have faced
demands not for “Capital”
but “Samsonite Bags” (hush
money) required to facilitate permissions
and clearances and acquisition of
land. The majority of these “Capital
Tourists” are just not used
to carrying such “Samsonite
bags”. There was an overall
airing of the view that despite the
FDI policy the dice was clearly loaded
in favour of the local players and
there is a lack of a level playing
field.
Role of Local Money
Therefore, the real fact is that it
is not foreign money that has driven
the real estate zoom but local money.
It is no secret that the Indian economy
has been on an overall boom cycle
and that fact is being clearly reflected
on the Indian stock markets and a
lot of the profit from there has migrated
to the real estate sector. As one
leading Indian developer responded,
there is more than enough local money
floating around for real estate and
that's the reason why the Government
has opened 100 percent FDI in the
sector in the first place. He also
defended that the Indian partner takes
the risk of land acquisition and getting
all the clearances for development
and is therefore entitled to his demand
for profit at the market rate. His
view was that the need for foreign
investment is really in much larger
issues like the development of real
estate related infrastructure and
foreign investors are just not looking
at that opportunity. A leading banker
for the housing sector too advised
the foreign investors that rather
than looking at large developers as
partners who really don't need foreign
money or are being chased by several
suitors; they should look for partners
who are professional and transparent
and ones who could do with their international
learning curve of the international
investors in planning and developing
larger projects than the local have
executed thus far. He also suggested
them to focus on the 35 towns with
a population of a million or more
that are waiting to upgrade themselves
to metros rather than chasing the
existing eight metros. The expected
returns in these areas are still very
attractive as compared to what their
money was earning elsewhere.
Corruption is not an India phenomenon
alone. It exists around the world.
But, by and large the general view
was that India is getting more transparent
and as one of the attendees expressed
“the days of the samsonite bag
are numbered”. It is also clearly
emerging that the regulators are cautiously
but surely addressing the ambiguities
of this sector in terms of the financial
markets. Full convertibility, REITs
and Real estate mutual funds, structured
debt instruments are no too far on
the economic horizon allowing for
better exit strategies. Then, there
are already opportunities available
for foreign money to by pass the FDI
norms like investing in the hospitality
industry not withstanding that the
FDI norms too are being relaxed over
time to accommodate the genuine needs
of long term foreign capital. Clearly
the consensus is that the 'Capital
Tourist” is welcome, provided
the capital brought has a serious
and a long term intent of parking
itself here in the development of
the nation. The return on capital
in time will tighten but will still
be great if not spectacular given
the appetite of this nation in terms
of its people and resource power.
(Umesh Luthria Sector Analyst
& Consultant Editor to New Media
Communications was a participant at
the India GRI2006)
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