KOLKATA - It's not just the
stock markets in India that are being swarmed by a gush
of foreign funds. The same goes for the country's
property markets. After a slow start of foreign direct
investments (FDI) in property, there has been a sudden spurt
in foreign construction and housing groups taking
up projects in India. Industry sources, such as
the Confederation of Real Estate Developers Association
in India, say the real-estate sector is set to see a
capital infusion of more than US$7 billion next year, of
which as much as $5 billion has been committed by
"This is the first time ever
that foreign players are queuing up to be a part of the
real estate sector in India," says Deepak Bhavsar, India
country head (research and consulting) of global
consultancy firm Chesterton Meghraj. According to
Bhavsar, though global property developers realized the
potential of the Indian realty market quite a few years
back, they have been stymied by the country's
"property-related policies and the investment climate".
The interest is indeed sudden. Ever since India
started liberalizing its economy, the international
property investors' refrain has been that though the
country opened up its most crucial infrastructure
sectors to foreign investments, it resists allowing FDI
in the property market. The government justified this by
citing political and security compulsions. However,
realizing the huge investment potential in India,
Chesterton Meghraj estimates that the country will
require investments of $24 billion over the next five
years and that development of the real estate segment is
crucial for its economic growth. The same belief led the
erstwhile National Democratic Alliance government under
the Bharatiya Janata Party to make a concession two
years ago when it permitted, as a part of the budget
proposal, FDI in township development, information
technology parks, special economic zones and hospitality
But many feel the liberalization was
half-hearted. For instance, though the new policy allows
a 100% FDI stake in a venture - which, incidentally, is
allowed in few sectors - there are stumbling blocks in
the form of clauses, such as a minimum lock-in period of
three years before original investment can be
repatriated, and a project completion mandate that a
minimum of 50% must be completed within five years of
possession of land. This is why there were few proposals
in the initial years. But over the last six months, a
slew of foreign construction groups have been seeking
government clearance to invest in the country. A dozen
proposals (see below) came up for approval during this
Major FDIs in India
Dubai-based Emaar Group has invested $100 million in
a township project in Hyderabad that includes a hotel
and a golf course.
Jakarta-based Salim Group is to invest over $100
million in a 309-acre (124 hectares) township project in
Kolkata. This Rs500 million ($11 million) project will
be developed as a joint venture between Salim Group and
the Kolkata Municipal Development Authority.
High Point Rendel of UK, US-Based Edaw Ltd and
Kikken Sekkel of Tokyo have teamed up to work on a
township development project in Jharkhand.
Canada-based Royal Indian Raj International
Corporation is coming up with $791 million for Royal
Garden City, a fully integrated township in Bangalore.
The total development will include 35,000 residential
units with an investment of approximately $2.9 billion
and is scheduled to be completed by 2015 in various
phases. This is the highest FDI investment till date.
CESMA International Pvt Ltd, a subsidiary of the
Singapore government's housing agency, along with the
Andhra Pradesh state government, is promoting a township
Lee Kim Tah Holdings (a Singapore-based company)
with an investment of $115 million is developing a
100-acre mega township along with commercial complex and
related social infrastructure near Mumbai.
The Andhra Pradesh Housing Board has approved a
50-acre township in Vijaywada. CESMA International will
construct houses and apartment blocks here.
Malaysian developer IJM is working on a township
spread across 35 acres in Hyderabad near Hi-tech City.
Ho-Hup Construction Company Berhad is coming up with
a 125-acre development project at Shamshabad in
Hyderabad along with the Andhra Pradesh Housing Board.
SembCorp Engineers and Constructors Pte Ltd,
Singapore, is working on eight projects in Mumbai, Pune
and Bangalore. The company has invested $50 million.
Universal Success Enterprise Limited of Indonesia
has signed a memorandum with Delhi-based developer
Unitech Ltd for a $155-million information technology
park and housing project in Kolkata.
Singapore's fifth-biggest property group, Keppel
Land Ltd, made its first foray into India after buying
land in India's software capital Bangalore for $13
million. Keppel Land, which is partnering Puravankara
Projects Ltd, is developing the first phase of a
condominium project located in an area known for
high-tech campuses. It will be launched in early 2006.
Singapore-based Evan Lim & Co Pte Ltd is
associated with a township development project in
Visakhapatnam, Andhra Pradesh.
It is not
difficult to guess the reason behind the rush. "There
has been a significant progress on the demand side,
fueled by a booming economy, availability of cheap
housing loans and rising real estate prices across most
parts of the country," says Sanjay Verma, joint managing
director of Cushman and Wakefield, another global
property consultancy firm.
Both Verma and
Bhavsar believe there's another significant reason,
which they call the China factor. While Bhavsar says
foreign investors have increasingly started eyeing the
Indian property sector because the Chinese real estate
market is reaching some degree of saturation, Verma
says, "Foreign investors are daunted by the structure of
Chinese real estate, where majority of the land is
leasehold and owned by the government. Foreign investors
prefer to bet on freehold land, which is available more
freely in India than China."
availability and yields on investment both in the
commercial and residential sectors in India are
currently the highest in the region (table below).
Moreover, "cities like Mumbai are witnessing an inner
transformation where locked lands of closed industries
are slowly being brought into the market", according to
Chesterton Meghraj. "A number of freehold plots of
closed manufacturing units are being converted into
apartments and retail and entertainment zones, and are
also attracting information technology-led office
development. This is a big opportunity."
rates data from Chesterton Petty and Chesterton
The other big opportunity,
say industry sources, is the involvement of state
governments in large-scale government projects like
development of the surplus land of Mumbai Port Trust or
that of sick public sector firms. "State governments
have realized that they can make more money if they get
into joint ventures with private developers than just
selling the land," says Bhavsar, who feels that this is
an ideal opportunity for foreign investors because such
arrangements reduce entry-level costs.
Nevertheless, stringent clauses still restrict
free FDI flow in Indian real estate markets. "Given the
internal rate of return on capital investments in India,
the country should have attracted far more FDI than what
it has until now. But lack of flexibility in policy is a
constraining factor," says Verma. While China attracts
about 3.2% of its gross domestic product as FDI in its
real estate sector, India draws a measly 1.1%.
"In India, it is very difficult to find large
plots near big cities," says Tariq Vaidya, research head
of Knight Frank India. "Foreign investors prefer to
stick to larger cities because returns there are more
lucrative. That's one reason I feel that the $5 billion
FDI projection doing the rounds is optimistic."
Moreover, a minimum lock-in period of three years from
completion of a project is mandated, which "nullifies an
investor's flexibility to play around with the time
frame or phasing the project when circumstances get
beyond control", says Verma. The other problem that acts
as a dampener for foreign investors, adds Verma, is the
insistence of local financial institutions on a personal
guarantee from property developers over and above the
land as collateral. Another problem is that local banks
and financial institutions also tend to loosen their
purse strings when property prices are rising because
that raises the value of their collateral, but when
prices fall, they pull out, triggering a bust.
Still, all agree that the potential of India's
real estate sector is huge. "It is one of the most
attractive markets on two counts. One, with a
billion-plus population, the opportunity is huge; no
other market is going to witness this kind of growth
both in commercial as well as residential and retail
markets. Two, the industry has an average internal rate
of return [IRR] on capital in excess of 30%," says
Verma, adding that "it is not unusual for local
developers to achieve IRR of as much as 50%". Could be
the reason why Sam Zell, the largest US landlord, is
sold on India as well? Zell, who recently announced that
he plans to replicate his famous Homex model in India,
says, "There's probably no better market in the world
for low-cost housing."
Indrajit Basu is a
Kolkata-based equity analyst
turned journalist with more
than 12 years of experience in business/finance and
technology journalism. Besides writing for Asia Times
Online, he also writes for US-based publications, as
well as IT companies.