Real Estate

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

This year's special Diwali trading session in Mumbai comes with a surprise gift from Prime Minister Narendra Modi: the most relaxed norms for foreign investment in Indian real estate since the industry began opening up a decade ago.

Gone, with a stroke of a pen, are government restrictions that prevented global investors from putting their money in small construction projects, and made it tough to exit larger ones.

What's more, foreigners can now earn rent by investing in completed commercial property projects, something they couldn't do earlier. The new rules will also allow some imported brands to have their own stores. With Apple outlets as footfall-grabbing tenants, Indian shopping malls could prove more valuable assets. If this is how Modi's going to respond every time his party loses a state election, investors will gladly wish him more defeats.

India's cash-strapped developers certainly aren't complaining about the investment guidelines announced Tuesday evening. They can now redevelop smaller parcels of more expensive city-center land with foreign equity.

Knowing that builders are unlikely to run out of money should also bring discouraged home buyers back into the market. At present, purchasers have no idea when they'll get the keys, or indeed if they ever will. Before the new rules, more than 70 percent of unsold homes in the top six Indian cities were facing a wait of least 18 to 24 months for completion, according to Rising Straits Capital Management, a private equity firm in Singapore that has $1 billion invested in India-focused real estate and infrastructure. 

Losing Steam
Source: Bloomberg

A more liquid, income-generating real estate sector is sure to pull in new foreign investment, especially from the family offices of wealthy non-resident Indians. Don't bet on an immediate deluge, though. With some U.S. and Australian property projects offering leveraged returns of 14 to 15 percent, it's hard to see real-estate funds thronging the less-developed Indian market, at least not with expectations of a 5 to 6 percent annual depreciation in the rupee baked into calculations.

It's probable the nation's publicly traded developers, such as DLF, Oberoi Realty and Prestige Estates, will be highly sought after during Wednesday evening's hour-long ``Muhurat'' trading, a symbolic stock market ritual during the Diwali festival.

Easier access to foreign money won't by itself repair the builders' shaky financial foundations. Their intolerably high cost of capital won't ease meaningfully until the domestic banking system is more confident about lending to them. But these new investment norms will at least stem further rot.

Over time, the Indian property market might even emerge as a viable asset class for international investors. Real estate investment trusts can greatly speed up the process, provided the government can do away with the tax on dividend distributions. With any luck, the moribund industry won't have to wait for Diwali 2016 -- or another election upset -- for its next fillip.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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