Global realty funds eye India with $15 bn kitty

With doors open for foreign investment in realty sector, opportunity funds targeted at India have raised $15 billion overseas.

According to the latest research report by Citigroup Global Markets on real estate investment trusts, global property investors appear to be eager to put money in India, where a developer can recoup his cost on rental properties within three to four years "" something that is not seen in most developed markets.

The initial yields are pegged at 15 per cent and even higher on developments and 10 per cent on acquisitions of properties.

The high yields are, however, not without risks, which include currency, economic, political, macro and potential event upheavals, points out the report.

There are distinct possibilities of overbuilding, increasing speculation, and pullback or slowdown in outsourcing.

The need for money is estimated for IT office development at $1.50 billion for 30 million square feet (MSF) of office space at an all-in cost of $50 per square feet (PSF).

Retail, residential, and other development could amount to a few billion dollar more. IT office is the most straightforward investment option in India with strong demand and defined rental rates of about $8-$10 PSF per year.

Residential offers enormous margins of 30 per cent-50 per cent, as it is usually pre-sold before constructions starts, allowing most developers to self-fund their ambitious development programmes.

India has become the desired backoffice for much of the western world owing to its human capital who speak English and burgeoning IT capital. Currently, an estimated 1.2 million people are working in IT and BPO, which expected to grow 30 per cent-40 per cent per year, generating an estimated annual need for 30 MSF office space. At present, there is only 90 MSF of IT office space in India.

The fear is that global capital will chase land prices up for IT office for development on a level that will generate low-double digit yields.

Office development costs of $50 PSF are a bit higher that actual cost on Tuesday with land accounting for $15 PSF.

Tenant credit quality, however, is not a concern as majority of office space is likely to be leased by Fortune 500 companies from the US and top companies in Europe, the report says.