FDI in construction sector falls 59% to $1.9 billion

New Delhi: FDI in construction sector fell by 59 percent to USD 1.9 billion during last fiscal despite relaxation in norms in the last 2-3 years, according to the Economic Survey.

The real estate sector is facing demand slowdown in the last few years leading to fall in housing sales and new launches during 2016, delay in project execution and rise in debt of developers, the survey mentioned.

Listing out challenges before the sector, the survey said, "Some of the issues and challenges affecting growth in real estate and housing sector include approvals of permits, high land registration costs including stamp duty, rising debt levels and NPAs, lack of skilled workforce and delayed delivery of houses by builders".

The real estate sector including ownership and dwellings accounted for 7.6 percent share in India's overall GVA in 2015-16. The sector's growth fell to 4.5 percent in 2015-16 from 6.7 percent in 2014-15 and 7.5 percent in 2013-14.

"Foreign direct investment (FDI) inflows to the construction sector have also declined to USD 1.9 billion in 2016-17, as against USD 4.6 billion in 2015-16 even though there was relaxation of FDI norms for the construction development sector undertaken over the past two to three years," the survey said.

FDI is allowed 100 percent in the real estate sector, subject to certain conditions. The norms related to size of the projects, lock-in period have been relaxed.

Stating that India ranks 185 out of 190 countries in dealing with construction permits as per the World Bank's Ease of Doing Business 2017 report, the survey said that it takes 6-12 months or even higher to obtain about 30-35 regulatory approvals to develop a real estate project.

This causes delays in execution of projects and also inflates the cost by 20-30 percent.

On housing sales, it said that the same fell to a five- year low during 2016 at about 2,45,000 units in top eight cities due to subdued demand over the past three years.

Similarly, new launches fell to 1,76,000 units during 2016.

"The decline in unit launches was significant at 64 percent, compared to the sales which was down by nearly one- third. This was primarily due to the prolonged slump and execution delays in project completion which resulted in inventory pile-up across all cities," the survey said.

Despite sluggish demand, housing prices did not fall with the NHB's RESIDEX showing increase in prices in 33 cities out of 50 cities in the fourth quarter of 2016-17 over the year- ago period.

The survey pointed out that bank's lending to the realty sector have been affected due to rising non-performing assets (NPA), higher risk provisioning assigned by the RBI to this sector and dwindling profits of builders.

"Among the major funding sources to real estate sector, bank lending to the real estate sector has significantly dropped from over 57 percent in 2010, to less than 24 percent in 2016, while private equity investment have increased (NAREDCO and KPMG)," the survey said.

The total housing credit outstanding of scheduled commercial banks till last fiscal was around Rs 8.6 trillion, with annual growth of 15.2 percent, while the total housing credit outstanding of housing finance companies (HFCs) was Rs 5 trillion with a growth of 15 percent.

Stating that the real estate sector has been "grappling with liquidity issues and piling debt", the survey said total outstanding debt of listed real estate developers rose to over Rs 83,000 crore (USD 12 billion) in 2015-16 from Rs 25,000 crore (USD 3.7 billion) in 2006-07.

It highlighted that the government has brought many new policies to help the real estate and housing sector.

These initiatives include Pradhan Mantri Awas Yojana (PMAY- Urban), a new real estate law, Smart Cities Mission, Real Estate Investment Trust (REITs), relaxation of conditions to claim tax incentive for affordable housing projects, and the Benami Transactions (Prohibition) Amendment Act.