As one of the fastest-growing economies in the world after China, India’s property market is booming, and foreign investors such as GE, Farallon, Emaar and Keppel are keen to capture a piece of it.

GE Commercial Finance, General Electric’s investment arm, announced in July that it was to invest $63m in a $350m property fund sponsored by Ascendas, a Singapore-based property developer and asset manager.


Already a large investor in business process outsourcing in India, this marked GE’s entry into commercial real estate investment in India. The seven-year Ascendas fund is expected to earn returns from the capital appreciation and lease rents from the IT parks that the company has developed in Indian cities, including Bangalore, Hyderabad and Chennai.

In May this year, Indiabulls Property (60% owned by US hedge fund manager Farallon Capital) paid about $60m for a prime 14-acre site in central Mumbai that it hopes to develop into commercial property.

In July, Keppel Land, a Singapore property developer, formed a joint venture with Purvankara, a Bangalore-based developer, in which it is to own a controlling 51% stake. The company is developing a 2.5m square-foot residential complex in Bangalore and is exploring opportunities in other cities, including Chennai, Hyderabad, Kolkata and Delhi.

Dubai-based Emaar Properties signed a joint venture in May with MGF, a Delhi-based Indian property firm, for an $833m project that will build integrated townships, roads and mass transit systems in India.

Attractive story

Anuj Puri, managing director at property research and consulting firm Chesterton Meghraj, says: “Foreign investors are buying into the India story. They see strong growth in the Indian economy and know that this means property prices will rise.”

Tishman Speyer, a US property developer, recently set up a joint venture with venture capital firm ICICI Venture to develop real estate in India. “Service industries have contributed significantly to economic growth in India and this creates demand for commercial space,” says Renuka Ramnath, CEO of ICICI Venture. “Interest rates have fallen, making owning a home more affordable for a large number of people.”

Investors predict that the consumption-driven growth of the Indian economy will translate into rising demand for homes, shopping malls, multiplexes and luxury hotels. The number of shopping malls alone is expected to grow four times to 358 by 2007, according to KSA Technopak, a research firm.

The government is preparing to open up retail trade to FDI and the entry of global retailers, such as Wal-Mart, Carrefour and Tesco, is expected to fuel demand for commercial space. After a visit to India in May, when he met with Indian prime minister Manmohan Singh, John Menzer, CEO of Wal-Mart’s International Division, told analysts that India represented a $250bn retail market and a “huge organic growth opportunity for Wal-Mart”.

Offshoring effect

India’s emergence as a favoured destination for global outsourcing also makes the prospects for investment in property attractive. About 70% of the offtake in the property market in the first half of this year was by India’s fast-growing IT and IT-enabled sectors, according to a recent report from property consultancy firm Colliers International.

A 2004 study of global offshoring by Jones Lang LaSalle found that cities in India and China would remain among the top destinations for offshoring for the foreseeable future, especially when labour costs are the key criteria for choosing locations. The firm’s global offshoring index lists three Indian cities – Delhi, Chennai and Bangalore – among the top five locations for offshoring based on cost advantage.

New rules that were implemented by the Indian government in February are acting as a catalyst for foreign investment into the property market. The rules allow foreign companies to set up subsidiaries to develop property with minimum capital of $10m, or joint ventures in which their equity contribution is $5m, provided that their investments stay locked in for three years and they build on a minimum plot size of 25 acres for housing development (down from 100 acres previously) or 50,000 square metres for commercial property.

Foreign backers must invest in green-field property development projects, a riskier proposition that includes the acquisition, development and marketing of property, and are not allowed to invest in built-up property.

“The FDI rules will attract risk capital or venture funds that are willing to take the higher risk in return for a large capital gain rather than just rental or lease income,” says Mr Puri.

Analysts are not surprised that most foreign investors prefer the joint venture route to investment even though they can go it alone by setting up subsidiaries. “This is not an easy market to enter because it is not completely transparent nor is it cheap,” says Akshaya Kumar, CEO of Colliers International India. “Acquiring land can be a complicated exercise and finding land with a clear title is a challenge. Having an Indian partner helps the investor to deal with these issues.”

Risk challenges

“The risk of litigation and procedural delays are a big challenge,” says Gagan Banga, a director at Indiabulls Property, a joint venture between a local brokerage and Farallon Capital. A recent purchase by the company – an eight-acre plot that once housed a textile mill in Mumbai – from the state-owned National Textile Corporation is embroiled in litigation because its previous private owner has challenged its nationalisation.

Yet Indiabulls raised $150m from foreign institutional investors, including Goldman Sachs, Merrill Lynch, JPMorgan and Tiger Management, in a global depository offering in July that will go into funding its property purchases.

Clearly, investors face significant risks in these investments. Mr Puri lists four hurdles. The first is inadequate infrastructure, such as roads, electricity and water. The second is the poor records of land ownership that make it hard to determine if a piece of land has a clear title. The third is the bureaucratic processes to acquire clearances, including transfer of use of agricultural land for development. The fourth is the use of black market money in land purchase transactions.

Government partners

Some investors are teaming up with the government to help mitigate some of their risks. “The local government has emerged as a partner in several states that are keen to attract FDI. This reduces the risks involved in acquiring land and getting clearances for the project,” says Mr Puri.

Ironically, West Bengal, an eastern state governed by a coalition of Marxist parties, is emerging as a role model. The government there is negotiating with Indonesian tycoon Anthony Salim to build a $10bn industrial township. If the 2000-hectare project does materialise, it will be the largest FDI in the sector and will produce more than twice the total FDI that India received last year.

Emaar Properties has teamed up with the government of Andhra Pradesh to develop a $170m convention centre and golf course near Hyderabad.

The larger risk that these investors take is that they may be buying into a bubble that will fail to deliver promising returns. Colliers International’s report on the Indian property market stated that the annual gross yield on commercial real estate across metro cities ranged between 9% and 11%.

Mr Kumar says that investors could expect a 20% internal rate of return on investments per annum if the current rise in capital values continues. That sort of return is enough to keep investors coming in.