Foreign Funds In Realty On Hold By Property Vertical At Isnare.com Ezine Articles

MUMBAI: The wait for foreign venture capital funds (VCFS)to invest in India’s realty sector just got longer.The Reserve Bank of India, which has opposed investment by overseas VCFs in real estate in the past, has cited concerns relating to valuation practices in this segment, besides questioning the eligibility of such funds to invest in the sector.

It has also questioned whether real estate could qualify as a promotional activity for foreign capital funds.These were spelt out on Friday at the meeting of the High Level Committee on Capital and Financial Markets (HLCC) convened to resolve this issue which has been hanging fire for well over eight months.

The HLCC, which monitors major developments in the financial sector and seeks to co-ordinate policy responses, is headed by the RBI governor. It also has on board the chiefs of all the major regulatory bodies — Sebi, Insurance Regulatory and Development Authority (Irda) and Pension Funds Regulatory and Development Authority.

Close to a dozen foreign VCFs have submitted proposals seeking to invest over $1bn in the country’s realty sector. They have been waiting on the sidelines, attracted by potential returns of over 15% in an economy which promises to maintain a growth of over 7% over the next few years.

The proposals of VCFs were initially approved by Sebi, the capital markets regulator, last year. The issue has come to a standstill since then after the RBI raised objections on a few counts. Last year, the RBI had opposed it saying that it violated FDI norms, which restrict investment in realty.

The RBI’s worries stem primarily on account of a possible build-up of asset prices which could have an adverse impact on inflation and financial stability. A sustained rise in realty prices, out of sync with the fundamental value, could lead to an asset price bubble.

Central banks, the world over, are watchful of such developments and the RBI is no exception to this. To prick such a bubble, the monetary authorities generally resort to tightening or raising interest rates to ensure a slow down.

A few months ago, the RBI had sounded a caution on the dangers of a possible asset price bubble when stock prices and property prices moved up in tandem. Since then, banks have been told to keep aside more capital when lending to the real estate sector and also for housing.

At the back of the regulator’s mind could be the economic turmoil faced by some countries, including in the Far East, after an asset price bubble burst. An unstated reason could be worries on the quality of capital flows.

It is not just the RBI that is worried. Deepak Parekh, the head of India’s leading housing mortgage firm, HDFC,has also voiced concerns regarding the heating up of property prices in major parts of the country, especially Mumbai. He reckons that prices have to come down from the current highs, saying that they were unsustainable and could hurt the market.

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