Foreign Direct Investment in Indian Real Estate Dynamics of the Real Estate Market Dun and Bradstreet Chennai March 2007 Ashwin Ramesh Primary Real Estate Advisors

The Road so far Press Note 2 (2000) - FDI by NRI in housing & RE Real Estate Mutual Funds June 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 Constructions152 Citigroup Property Investors-120 Gera Developments Och Ziff-Nitesh Estates60 DSP Merrill Lynch-Mantri Developers55 Morgan Stanley-Mantri Developers65 Morgan 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 Ltd450 Ishaan Real Estate Plc ( K Raheja Corp )350 Dev Properties Ltd (Indiabulls Real Estate Ltd)265 Noida Toll Bridge50 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 May Feb 2007 FII Outflow (USD Mn) % Fall in Sensex117.7

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