NEW DELHI: Real estate sector has witnessed substantial increase in project costs during the last couple of years as foreign fund flow has almost dried up, while interest rates and input costs have headed northward, said Jones Lang La-Salle in a report.
While rising interest rates have led to costlier bank credit, the strict RBI guidelines have made real estate lending all the more cumbersome, the report pointed out. “Currently, the costs of key inputs for real estate development are up by at least 7%. This is over and above a rise of about 25% last year,” JLL said, adding that labour cost is up 10-15 % and the prices of steel and cement have gone up by about 7%. “The net rise in construction costs is approximately 20%. Therefore, the Indian real estate sector is in dire need of foreign funding, both for maintaining growth and containing costs.”
As the Real Estate Mutual Funds (REMF) remained a non starter, FDI is the only saver which the real estate sector can look up to, JLL said. However, the ever-changing policies on FDI, taxation and development, coupled with lack of transparency and a high amount of friction in approval mechanisms have led to an uncertainty in yields and tenure of lock-in for investments in real estate, the report said, adding that this has proved to be the biggest stumbling block in attracting FDI.
The total FDI in 2012-13 came down to around $1.3 billion as against over $3 billion in 2011-12. In the current year, the situation has further deteriorated. The biggest problem is the uncertainty surrounding the investment period. Shobhit Agarwal, JLL MD (capital market), said, “At present, if a foreign investor is willing to invest for a medium term like 5-6 years, he is bound to be hesitant as it is most likely that the targeted projects would take longer than 5 years in completion. Also, foreign investors are bound to miss out on the cream of returns, which come only after the project reaches advanced stages of development or nears completion
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