Striking gold in the Indian rubble

The Indian real estate sector is promising steadily rising returns.

It is raining investments into the Indian real estate sector. From foreign and domestic funds, banks and HNIs, everyone is queuing up for a piece of the expanding Indian real estate pie.

FDI's presence in the sector alone is expected to be nearly $16 billion over the next five to six years. The newest entrants into the sector are the ultra-conservative pension funds from the US that have been eyeing the steadily rising returns the sector has been offering.

On the other side, real estate developers all over the country are gung-ho about new projects. From Special Economic Zones (SEZ) and townships with high-class luxury apartments priced at Rs 1 lakhsq ft and swanky commercial office spaces to IT parks and mega malls, the Indian realtor's sweetest dreams are coming true.

Says the chief investment officer of a private bank's realty fund, "Even the short term investors are looking at stability over the next 24 months, while pension funds are betting on the Indian real estate market over the long term. Typically, these funds look at markets that are expected to remain stable over a 10-12-year period. That they are investing in India is a good indicator for international investors. After all, whether it is Emaar or Capitalands, it is money of foreign governments that is coming into India."

Adds Anthony Ryan, head of real estate investment banking for Asia Pacific at JP Morgan, "The outlook for India is very positive. The rapid GDP growth is very favourable for the housing sector and the outsourcing boom is creating huge demands for the commercial and office assets. The growth in organised retail ushers continuous demand for malls."

According to a 2005 survey by Merrill Lynch, organised retail, which accounts for just two per cent of the $200 billion sector, will grow from $4 billion to $15 billion by 2010.

Real estate in the same time frame is expected to grow from $12 billion to $50 billion. "Change in demographics, being more affordable and a rise in consumption are common factors driving growth in both these sectors," the report says.

US-based Warburg Pincus, Blackstone Group, Broadstreet, Morgan Stanley Real Estate Fund (MSREF), California Public Employees' Retirement System (CalPERS), Hines, Tishman Speyer and JP Morgan Partners are keen to invest in India.

Warren Buffet's Berkshire Hathway is also said to be interested. A group of NRIs has raised $150 million under the Indian Real Estate Opportunities Fund for projects in India. Nearly $3 billion will be available for investment in Indian real estate over the next 15-month period with a slew of joint ventures with internationals funds and developers on the anvil.

Says Mridul Upreti, head, corporate finance and investment, Jones Lang Lasalle, "From entity level buyouts to joint venture funds and partnerships in developing properties, we see a range of funds coming into India."

Adds Akshaya Kumar, CEO of Colliers International, "Already half a billion dollars worth of approvals are in place. In the next 24 to 36 months, the funds coming into India could touch anything between $3-5 billion."

Early bird investors include the Singapore-based Lee Kim Tah and Ascendas, Dubai-based Emaar, Australia's Macquarie Bank and Keppel Land, and Farallon and GE from the US.

Farallon has invested in a JV with the Mumbai-based India Bulls, while GE has invested in the IT park fund floated by Ascendas. Others who have committed funds to the Indian market are the Malaysian IJM group, Indonesia's Universal Success Enterprises and Ciputra Salim Group.

Most investible funds are expected to come from North American investors, European real estate funds and multinational developers from the Asia Pacific region who have been seeking opportunities in India.

Those eyeing the Indian market include dedicated real estate funds like Tishman Speyers which has tied up ICICI to raise $6 million for a joint VC fund, developers like the Dubai-based Emaar which has just tied up with the Delhi-based developer MGF for half a billion dollars for projects with a capital outlay of $4 billion. Keppleland has tied up with the Bangalore-based Purvankara developers to develop an IT Park.

Singapore based Ascendas has floated a dedicated IT park fund where other funds like GE have invested. GIC of Singapore is developing a residential complex near Chennai. The Indian Real Estate Opportunities fund has invested an undisclosed amount of Michael Dell's of Dell Computers private wealth in Pune recently.

All this, of course, in addition to funds being raised by the Indian financial institutions like HDFC, ICICI and IDFC abroad. Says Kumar, "The money could be used to develop business and IT parks, townships with a majority of the funds going into the top seven or eight cities." Adds Upreti, "Tier two cities could get a chunk of the funds if a tier one developer were to bring in a really big project."

The booming Indian real estate sector is reported to be growing at 30 per cent annually. What makes it even more attractive are the returns "" compared to other destinations in Asia-Pacific, yields in India are in the range of 10 per cent with RoIs in the range of 20 per cent. Elsewhere, it is around 7 per cent with returns around 10 per cent.

India's real estate market has come a long way according to Upreti. "Three years ago the business consisted of leveraging debt for a high networth individual who wanted to invest in property here, today the market has matured to a point where a city like Hyderabad can absorb two Rs 200 crore deals within a month."