Better transparency, clarity in realty norms will attract foreign funds

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The Financial Express

Global investors have turned cautious about investing in India’s real estate sector, and a September report from private equity (PE) research firm Venture Intelligence said PE investments fell over 20% to R3,740 crore in the first five months of FY 2011-12, compared with the same period a year ago. A critical shift in real estate policy and better on-ground execution are crucial for attracting more investments into the sector, says Howard Roth, Partner & Global Real Estate Leader at professional services firm EY. Moreover, investors need to take a long term view of the Indian market to be successful here, Roth tells Shubhra Tandon in an exclusive interview. Excerpts:

What, according to you, are the main concerns for investors as the global economy slows down? 
Investors believe that major cities of the West, like New York, Paris, Washington and San Francisco, are safe havens. One could argue that there is a mini bubble in those places that has dramatically pushed prices up, they are still considered safe for investment. However, they are also investing in Europe and in India, Brazil and China, for growth.

Delay in project approvals and executions have dampened investment, with many PE firms finding it difficult to reap returns on their investments. What are the lessons here for global investors?

Investors or PE players have learnt that if you are coming into India with just capital, expecting to succeed here, it’s not going to happen. PE funds find it tough here since they tend to think short term. But those who want to invest long term in India have learnt that you need to invest in people on the ground for the first few years. They may not make money immediately, and sometimes, even lose money. But that’s the education cost of understanding the system, the approval processes and the regulatory environment to be successful.

Does that mean the investor outlook remains strong for the Indian real estate market?

The macro investor outlook is not really a challenge. Be it Europe or the US, people want to invest here. But they are not going to invest if policy, financing and approvals, aren’t conducive to make money in the shorter term.

At the Ficci Real Estate Summit held last month, India’s minister for housing spoke about lending more transparency to the sector and bringing in the Real Estate Regulation Bill, 2011. Does that give some confidence to investors?

People want to be here, but that needs transparency and clarity in regulations. So what the minister talked about are critical to meet the massive demand here. Inadequate infrastructure also restricts investors. Critical shifts in policy regulations and on-ground execution are important. More mature western economies have all of those things in place.

What changes would global investors expect to see in Indian real estate regulations?

Global investors would like to see India being more open towards investing directly into real estate. It should be easier to exit the market. I think what will help the market in a big way is the introduction of REITs or Real Estate Investment Trusts, which don’t really exist here. This would spur capital inflows into the country, and bring institutional credibility to its real estate. In the last 12 months, many developing countries in the world have introduced REIT legislation, including the Philippines and Mexico. The framework of investing in securities or mutual funds, as it happens in India now, has been ineffective for real estate around the world.

How similar or different are the challenges faced by Indian real estate to those faced by countries like Sri Lanka, Nepal and Bangladesh? You said those economies are attracting good foreign money to real estate too.

I feel that there are similar circumstances to India. They are also thinking about their regulatory environment, they are opening it up, but at the same time, they don't want very massive influx of foreigners taking over and owning their country.