In an attempt to accelerate foreign investment in the country’s hospitality sector, the government has decided to exclude hotel and tourism projects from the purview of the three-year lock-in clause which governs real estate activities. The move is expected to give a fillip to the plans to increase the number of hotel rooms in the country manifold, besides enabling domestic realty majors to induct foreign partners in their projects.

Companies like Unitech and DLF, who have lined up massive projects in the hotels and tourism sector are keen to supplement liquidity with foreign funds. Currently, foreign direct investment (FDI) norms forbid foreign investors from repatriating profits back home for three years if investments are made in “real estate projects” including hotels and tourism-related ventures.

According to official sources, in order to avail of the proposed relaxation, projects must earmark a minimum 50% of built-up space for hotel and tourism activities, including beach resorts, restaurants and tourist complexes, and at least 20% for developing hotel rooms. The move will also benefit firms that incorporate hotel projects in their real estate projects.

However, the proposed relaxation would not apply to FDI in housing projects and office and shopping complexes. Current norms stipulate a minimum developable area of 25 acres and a minimum capitalisation of $10 million for wholly-owned subsidiaries of multinational companies and $5 million for joint ventures investing in real estate. Foreign investors are also not allowed to exit such projects before three years of completion of the project.

The tourism industry is badly in need of FDI to build hotels. “The hotels and tourism industry has recorded FDI inflows of $950 million from January 2000 to March 2009. To give a fillip to the sector, further initiatives are required,” said a DIPP official, involved in formulating the new norms.
According to tourism ministry estimates, there are about 1.2 million hotel rooms in the country. The requirement for 2020 is estimated to be 6.6 million rooms. Mixed projects are required for promoting tourism, feels DIPP.
Incidentally, last year DIPP had proposed relaxing the lock-in period in all realty-related activities, but it was shot down by the finance ministry, which feared it might lead to a property bubble.

The latest move is also expected also lead to price rationalisation as over the last few years, tariffs – especially in metros – have reached unrealistic levels owing to a demand-supply mismatch.
There has been huge interest among foreign investors to invest in mixed-use format, but they have been hesitant because of the minimum size and capital commitments, said an industry expert