The Global Pie - 29th Nov 2007 ( Economic Times

In 2003-04, India received total FDI inflow of US$ 2.70 billion, of which only 4.5% was committed to the real estate sector. In 2004-05 this increased to US$ 3.75 billion of which, the real estate share was 10.6%. However, in 2005-06, while total FDI in India was estimated at US$ 5.46 billion, with real estate share around 16%. The projected total FDI in 2006-07 will touch about US$ 8 billion in which the real estate share is estimated to be about 26.5%.

Private equity (PE) investment in India has overtaken China this year to emerge as the biggest Asian destination (excluding Japan) for PE funds. Investments have crossed $10 billion between January-October 2007 as against $8.3 billion recorded in China in the same period. Real estate and infrastructure emerged as the top sectors attracting PE investment this year accounting for half of the total PE money flowing into India through 52 deals. Out of this, real estate received $2.6 billion through 32 deals.

Global majors in Indian real estate

With official estimates for IT space likely to be 150 million sq. ft by 2010 and a shortage of almost 20 million dwelling units, Foreign funds from across the globe are confident of India as an investment destination. Among those tapping investment avenues are US-based Warburg Pincus, JP Morgan Partners, Merrill Lynch, Lehman Brothers, Warren Buffet's Berkshire Hathaway, Blackstone Group, Broadstreet, Columbia Endowment Fund, Hines, Sam Zell's Equity International, Colony Capital and Starwood Capital to name a few.

Last year, Tishman Speyer Properties, co-owner of the New York Times building and Rockefeller Center formed a joint venture with the private-equity arm of ICICI Bank to fund new commercial properties. Goldman Sachs' Whitehall Street Real Estate Fund has plans to invest up to $1 billion over the next two years in PE, real estate, private wealth management, and other businesses in India.

In mid-2007, Morgan Stanley closed a deal worth about US$ 150 million with Oberoi Constructions in Mumbai. Farallon Capital Management LLC, a U.S. hedge fund, and its joint-venture partner, Indiabulls, acquired an 11-acre property in central Mumbai for $54.5 million. Trinity Capital LLC, the New York-based fund, has planned an investment of $10 billion in India for developing 3 satellite cities on the outskirts of Mumbai, New Delhi, and Bangalore. The total investment might go up to $12 billion. Trinity has earmarked an investment of $2 billion-$4 billion for each of the townships, which will spread across more than 1,000 acre space.

Delhi based DLF Group has entered into a US$ 10 billion deal with UAE-based real estate firm Nakheel for residential projects in Tier I and II cities. The 50:50 joint ventures' projects will cover a total area of 40,000 acres near Gurgaon, Mumbai and in Pune. The Nakheel Group, which has to its credit renowned projects like The Palm Islands, The World, and Dubai Waterfront, is presently working on various other projects that amount to more than $30 billion.

Nakheel's has stiff competition back in Dubai in the residential sector from Emaar Properties. Emaar is planning to set up a 100% subsidiary in India as it already occupies an equal joint venture with Delhi based realty company MGF. The Emaar-MGF possesses a land bank of over 10,000 acres. The company has also launched a multitude of residential real estate projects in the north and one commercial project in Mohali. It is also engaged in another joint venture with the Andhra Pradesh government.

Indonesia's biggest conglomerate, Jakarta based Salim Group is to invest more than $100 million in a 309-acre township project in Kolkata, capital city of the east Indian state of West Bengal. This $11 million project will be developed as a joint venture between Salim Group and the Kolkata Municipal Development Authority.

India's booming real estate market is becoming a hot investment spot for cash-rich international pension funds, foundations, hedge funds, high net worth investors and Foreign provident funds. US-based hedge fund Trikona is considering a $200m investment in India's real estate sector.

California Public Employees' Retirement System (CalPERS) entered India, investing US$ 100 million in a US$ 400-million real estate fund promoted by India's Infrastructure Leasing & Financial Services (IL&FS).

Leading pension funds from the US such as the Pension Fund of Oregon State, Tiger Management, Oxif and prominent insurance company American International Group Inc (AIG) are among those investing huge sums in various real estate funds. Others include High Point Rendel of the UK, Edaw-US, and Japan's Kikken Sekkel. Singapore-based Lee Kim Tah Holdings with an investment of $115 million is developing a 100-acre mega township along with a commercial complex and related social infrastructure near Mumbai.

Another Dubai-based group Pegasus Realty will reportedly invest $150.4 million in Pune, Hyderabad, Chennai, and Coimbatore through joint ventures. The company has also created a $200 million corpus for the Indian hospitality sector. Hyatt, an international hospitality brand within the Global Hyatt Corporation, Paramount Capital Corpn, a U.S. based financial advisory firm and New Vernon Capital, a New Jersey-based hedge fund have already invested in hotel chains in India. One of the world's largest hotel and tourism firms Accor has also announced pan-India investment to the tune of $200 million. For this, it has tied with Delhi-based InterGlob Enterprises.

Impediments to FDI in Indian Real Estate

Since property is a subject that differs from state to state, there is a great degree of heterogeneity across the country. Foreign investors have to comply with different state laws in order to obtain state and city specific approvals depending on where the project is being undertaken.

One of the most critical obstacles to FDI is the lack of transactional transparency as the real estate sector in India is still largely unorganized. India's real estate markets are far less structured as compared to western countries. Developers also tend to have localized knowledge as very few developers have a pan-national presence.

The rapid economic growth of the last few years has put heavy stress on India's infrastructural facilities. Despite improvements in some areas, the deficiencies in infrastructure - roads, electricity and water supply - have not been fixed. Problems include power demand shortfall and port traffic capacity mismatch. HERE IS WHERE LIES A HUGE OPPORTUNITY FOR INFRASTRUCTURE PLAYERS TO MAKE SERIOUS MONEY. It is one of the most attractive markets on two counts. One, with a billion-plus population, the opportunity is huge; and two, the industry has an average Internal Rate of Return (IRR) on capital investment between 25-30%.

As the country's economic growth curve rises, the Indian real estate market is estimated to expand by more than three times to touch $60 billion by 2010 from the present $16 billion. Of the total market size, the share of Foreign investments is expected to reach $25 billion - $28 billion in the same period. The playground is open, come play!

Chetan D Narain - CEO - 'NARAINS CORP' Property Consultants and Realtors