Indian Real Estate: Attracting Foreign Investments

One hears stories of forged land titles, corruption, high taxes et al? Despite that, India's real estate market is gets warmer and warmer, soaring ever higher.

The world's second-fastest-growing economy after China, changing government policies, including a focus on infrastructure are driving the demand for housing developments, malls and offices, higher and higher.

'For investors seeking the high returns that are no longer possible in the mature European and North American real estate markets, India and China are hot,' said Prakash Gurbaxani, the Chief Executive of Bangalore's TSI Ventures, a joint venture of Tishman Speyer Properties of New York and India's largest privately owned bank, ICICI Bank, based in Mumbai.

'Every foreign investor group, including pension funds, high-net-worth individuals and private equity funds, are all looking at this sector,' said Gurbaxani, whose company has confirmed it will invest more than $1-billion in Indian real estate over the next few years.

A $12-billion real estate market that is expanding annually at the rate of 30%, a rapidly growing economy (8%) has seen a swelling middle class with an appetite for quality apartments, modern malls and a variety of stores, make the forecast for Indian real estate very rosy, indeed! So much so, analysts at Merrill Lynch predict India's real estate market will grow to $90-billion in 10-years time.

Though, foreign and domestic investors are scouring this market, it is only recently that real estate has begun to attract meaningful amounts of capital, says Rajesh Khanna, Managing Director (India) of the private equity firm Warburg Pincus. In the last year alone, Warburg Pincus has been dedicating a third of its financial resources in the sub-continent toward creating and evaluating real estate investment opportunities.

And soon, real estate developer DLF Universal's public offering is expected to raise over $3-billion in what is being billed as India's biggest share sale, topping earlier public offerings such as the $2.3-billion share sale of the government's Oil and Natural Gas Corp. barely two years ago. With real estate development projects in 18-cities, DLF plans to expand them to 36 in number.

For foreign investors, the gateway into India opened last year when the government eased restrictions on foreign ownership of real estate, construction and housing companies. Foreign developers are now allowed wholly owned subsidiaries in India if they invest $10-million, and can build commercial and residential buildings, if the projects exceed 50,000-sq. m. (about 538,000-sq. ft.).

Since, relaxation of rules has brought in a rash of foreign real estate funds and investors, only recently, the California Public Employees Retirement System invested $100-million in a real estate fund floated by IL&FS Investment Managers of India. In March this year, Morgan Stanley's real estate investment arm said it would pay $68-million for a minority stake in an Indian property firm, Mantri Developers.

All this has, Merrill Lynch predicting the Indian real estate sector will grow from the current $12-billion to $90-billion by 2016. And, Warburg Pincus too, is negotiating for several real estate investment opportunities, including technology office parks. 'We see ourselves investing a few hundred million dollars in real estate in India over the next couple of years,' says Khanna.

As more than a third of India's billion-plus people are under 25-years old, such a young demographic picture coupled with low mortgage rates is only making the Indian housing sector buoyant.

Further, Merrill Lynch believes, outsourcing, growing more than 30% a year and bound to create 200,000 jobs yearly, will increase the demand to more than 15-million sq. ft. of commercial space each year. A fact confirmed by government data, which suggests there is a shortage of 100-million homes and about 100-million sq. ft. of office space in the country.

The picture for Indian real estate continues to look bright as boom times continue, with India's economy fuelling the growth for real estate residential and commercial space.