Foreign Direct Investment in Indian Real Estate

Dynamics of the Real Estate Market

Dun and BradstreetChennai

March 2007

Ashwin RameshPrimary Real Estate Advisors

The Road so far

Press Note 2 (2000)

- FDI by NRI in housing & RE

1999

2005

Real Estate Mutual Funds

June 2006

2001-2002

2004

Press Note 4 (2001)

- FDI in integrated township (100 acres)

- FDI in hotels & tourism

- FDI in IT Parks (2002)

April 2004 Amendment to VCF & FVCI Regulations removing RE from negative list

Banks – inv. in VCF priority sector

Press Note 2 (2005)

Investment norms NRIs relaxed

Opening of FDI in select projects

Real Estate VCFs

FDI in real estate further relaxed

REITs/ REMFs

Regulatory framework - Press Note 2 (2005)

FDI up to 100% is permitted under automatic route

Development criteria:

Minimum 10 hectares / 25 acres to be developed for serviced housing plots

For construction-development projects, minimum built-up area of 50,000 sq mts

In case of a combination project, any one of above two conditions would suffice

Investment conditions

Minimum capitalization of US$ 10 Mn for wholly owned subsidiaries & US$ 5 Mn for joint ventures with Indian partners

Funds to be brought in within 6 months of commencement of business

Original investment cannot be repatriated before a period of 3 years from completion of minimum capitalization. Investor may be permitted to exit earlier with prior Government approval.

At least 50% of project must be developed within 5 years from date of obtaining all statutory clearances

Investor not permitted to sell undeveloped plots

Project to conform to norms & standards laid down by respective State authorities

Investor responsible for obtaining all necessary approvals as prescribed under applicable rules/ bye-Laws /regulations of the State

Concerned Authority to monitor compliance of prescribed conditions by developer.

Other conditions

Press Note 2 [2005] - Unresolved issues…..

What sort of development is envisaged – Greenfield / Brownfield

Up to what stage in a project can a FDI investor participate?

What comprises ‘built-up area’?

Whether USD 5 Mn investment norm applies to each foreign investor in a joint venture (‘JV’) separately or to foreign investors for the JV company as a whole ?

- If two foreign partners invest in Indian JV Company: minimum capitalization will be USD 5 million or USD 10 million ?

Press Note 2 [2005] - Unresolved issues

Contd…

Whether lock in applies only to minimum capitalization or entire original investment?

When does the 6-month period for capitalization commence with respect to projects undertaken by existing companies and how is the lock in period determined?

– Incorporation Date - January 1, 2006

– Signing of the JV agreement - April 1, 2006

– Minimum capitalization to be completed by what date?

– Assuming minimum capitalization completed June 1, 2006– 1st tranche of USD 10 million brought in June 1, 2006– 2nd tranche of USD 100 million brought in January 1, 2007

– Lock in period on what amount and for what period ?

Whether premium on issue of shares part of minimum capitalization?

Whether fully convertible debentures can be considered for the purpose of minimum capitalization?

Press Note 2 [2005] - Unresolved issues

Contd…

FDI vs. FVCI ….deadlock continues

Does FVCI need to follow FDI restrictions ?

Since September 2005 no new FVCIs

RBI fears asset bubble, wants to restrict capital flows into real estate

FDI Investments under automatic route pour in

Exit pricing restrictions apply, market believes they will fade away

Impact of FDI

So far, negligible

About USD 750 Million deployed

Potential, huge

Another USD 7 – 8 Billion waiting in the wings

Some recent transactions

Companies USD Mn

Morgan Stanley–Oberoi Constructions 152Citigroup Property Investors- 120Gera Developments Och Ziff-Nitesh Estates 60DSP Merrill Lynch-Mantri Developers 55Morgan Stanley-Mantri Developers 65Morgan Stanley- Alpha G Corp 65

Indian Realty Companies Listed on AIM

Name of the Company Amount Raised (US$ Mn) Unitech Corporate Parks Plc (Unitech Ltd) 360

Trinity Capital Ltd 450

Ishaan Real Estate Plc ( K Raheja Corp ) 350

Dev Properties Ltd (Indiabulls Real Estate Ltd) 265

Noida Toll Bridge 50

Hiranandani Constructions Ltd 750

Impact on real estate consumers

Combined with a conducive land supply and approvals environment, and infrastructure, FDI can create high quality real estate stock of international specifications at reasonable prices

Better choice, better use of technology, international amenities and planning

Compared to 1991, don’t we have today much better cars, motorcycles, telephone systems, white goods ?

Impact on developers

Professionalise

Accountable

Raise the bar

Adopt global best practices

Attain size and scale

Change their mindset

Improve or perish

Deal Structuring – Layered process

Agreement – Fund and Developer – key issues

Affirmative Voting Rights Reserved Matters Indemnification against third party claims Debt raising Non Compete Liquidation Event Dispute Resolution Tag Along Exit

Impact on the industry

Consolidation

Standardisation of product

Tighten and improve supply chain

Convergence of capital markets

Increased participation by the finance community – sophisticated

structuring, instruments, retail investor

Environment friendly

Westernised

First, the roadblocks need to be cleared

Land supply laws

Land Zoning and Approvals Process

Infrastructure – hard and soft

Stable policy that is forward looking

A word of caution

  15 - 22 May 2006 22 - 28 Feb 2007

FII Outflow (USD Mn) 851 870

% Fall in Sensex 11 7.7

Thank You

If you would like any further information or clarifications, please contact:

Name E-mail Tel No.

Ashwin RameshAshwin@PrimaryIndia.com 91-22-2285 303291-98210 40267

Address: Primary Real Estate Advisors P LtdRegent Chambers, #107, Nariman Point,Mumbai – 400 021India

Website: www.PrimaryIndia.com

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