Healthcare Real Estate and Investment in India

Introduction

The healthcare sector is one of the fastest-growing industries in India, encompassing hospitals, medical devices, clinical trials, outsourcing, telemedicine, medical tourism, health insurance, and medical equipment. Several laws govern the construction and land development of medical facilities, and transactions in medical real estate are also subject to Foreign Direct Investment (FDI) policies.

Healthcare real estate is a niche market within the broader real estate industry, including hospitals, medical offices, and healthcare campuses owned by hospitals, health systems, or private investors. Recently, private equity firm Toro Finserv initiated a $500 million investment in healthcare real estate, marking India’s first fund dedicated to infrastructure development for hospitals and diagnostic centers.

What Makes Healthcare

Investments Attractive?

1. Rising Demand for Medical Infrastructure – India has only 9 hospital beds per 10,000 people, whereas the international standard requires 30 beds per 10,000 people. The country needs 3 million additional beds and 1.54 million doctors to meet global healthcare standards.
2. Urban-Rural Disparity – 70% of India’s healthcare infrastructure is concentrated in the top 20 cities, creating an urgent demand for medical facilities in rural areas.
3. Increasing Burden of Diseases – The rise in non-communicable diseases such as diabetes, obesity, infertility, cancer, and tuberculosis (TB) has driven demand for more healthcare infrastructure.
4. Technological Advancements – Medical procedures are increasingly being performed in outpatient medical offices rather than hospitals, boosting the demand for medical office spaces.
5. Shortage of Medical Facilities – Many cities have tight medical office markets due to limited new construction, creating opportunities for high-yield real estate investments.
6. High Lease Rates and Investor Interest – Healthcare real estate provides stable returns, attracting both domestic and foreign investors.
7. Medical Tourism Growth – India is a cost-competitive destination, with surgical costs being one-tenth of those in the U.S. or Europe. Fertility treatments, Ayurveda, Siddha, Unani, and naturopathy attract international patients, further driving demand.

Foreign Direct Investment (FDI) in Healthcare

Healthcare has witnessed a significant rise in FDI over the past decade. The value of private equity transactions in healthcare increased from $94 million in 2011 to $1.275 billion in 2016.

FDI Regulations for Healthcare Real Estate & Services:

1. Real Estate Development – Foreign investors can invest under FDI policy in townships, housing, and built-up infrastructure projects.
2. Hospitals & Medical Devices – 100% FDI is permitted under the automatic route.
3. Pharmaceutical Sector:
   • Greenfield Projects – 100% FDI under the automatic route.
   • Brownfield Projects – Up to 74% FDI under automatic route, beyond which government approval is required.
4. Health Insurance – The FDI cap in the insurance sector (including health insurance) was increased from 26% to 49% in 2016, with the condition that Indian ownership must be retained.

Foreign Venture Capital Investments (FVCI) in Healthcare

Foreign venture capitalists investing in India’s healthcare sector must register under SEBI’s Foreign Venture Capital Investment (FVCI) regulations, which offer significant advantages:

No compliance with pricing guidelines under FDI policy for acquiring or transferring securities.
Exemption from open offer requirements under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
SEBI-registered FVCIs are classified as Qualified Institutional Buyers (QIBs), allowing participation in IPOs via the book-building process.
Exemption from the lock-in period if shares are held for at least one year before IPO filing.

SEBI has also allowed FVCIs to invest in research & development (R&D) sectors in pharmaceuticals and alternative investment funds (AIFs).

Healthcare Real Estate Investments

In 2016, SEBI proposed including hospitals under the definition of real estate to encourage Real Estate Investment Trusts (REITs). Despite hospitals falling under the Ministry of Finance’s infrastructure definition, SEBI recognized that hospital properties generate rental income, making them suitable for REITs.

Why Invest in Healthcare REITs?

Premium Yield – Healthcare REITs generally trade at a higher yield than other REIT categories.
Stability – Economic downturns have minimal impact on healthcare real estate demand.
Regulatory Compliance – Healthcare real estate transactions require compliance with public safety, environmental laws, and financial conflict-of-interest regulations.
Third-Party Management – Hospitals are increasingly shifting towards third-party ownership and leasing arrangements to reduce financial burdens.

Challenges in Healthcare Real Estate Transactions

Regulatory Hurdles – Medical facility leases must meet strict legal criteria to avoid compliance violations.
Operational Costs – Physicians seeking to own medical real estate face high liabilities, loan terms, and operational risks.
Tax & Investment Risks – Uninformed property arrangements can expose healthcare providers to financial and reputational risks.

Taxation in the Healthcare Sector

Corporate Taxation

• Domestic Companies: 30% tax on worldwide income. For small businesses (turnover < ₹50 crore in FY 2015-16), tax is 25%.
• Non-Resident Companies: 40% tax on income earned in India.
• Dividend Distribution Tax (DDT): 15% tax on dividends paid by Indian companies.
• Capital Gains Tax:
  • Long-term gains (unlisted securities) – 10% tax for non-residents.
  • Short-term gains on listed shares – 15% tax.

Exemptions

• 100% deduction on capital expenditure for hospitals with 100+ beds.
• 5-year tax holiday for hospitals (constructed before March 31, 2013) outside metro cities.
• Charitable hospitals enjoy additional tax exemptions.

Regulatory & Compliance Requirements

1. Environmental Norms

• Authorization for medical waste disposal under the Bio-Medical Waste (Management & Handling) Rules, 1998.
• Clearance from the State Pollution Control Board under the Water & Air (Prevention & Control of Pollution) Acts.
• Incinerator approval from Municipal Corporations.

2. Licensing & Approvals

• Construction & Fire Safety Permits – Compliance with state-specific building & fire safety regulations.
• Hospital Registration – Under the Shops & Establishment Act and state-specific private medical establishment laws.
• Medical Licensing – Approval under Pre-Natal Diagnostics Techniques (Regulation and Prevention of Misuse) Act, 1994 and Medical Termination of Pregnancy Act.
• Food & Drug Administration (FDA) Licenses – Required for operating pharmacies & blood banks.
• Radiology Permits – License from Atomic Energy Regulatory Board (AERB) for X-ray, CT scan, and cath labs.
• Narcotic Drug License – For handling controlled substances.
• Labor Law Compliance – Registration under various labor welfare laws.

The Indian healthcare real estate sector presents significant investment opportunities driven by rising demand, regulatory reforms, and increased foreign investment interest. However, strict compliance requirements make legal, financial, and regulatory expertise crucial for investors, developers, and healthcare providers. Strategic partnerships with legal advisors, financial consultants, and real estate experts are essential for navigating complex healthcare real estate transactions and ensuring sustainable investments.