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FDI rush in Indian real estate
By Indrajit Basu

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 foreign investors.

"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 sectors.

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 period.

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 in Hyderabad.
  • 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."

    Besides, land 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."



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    (Yield rates data from Chesterton Petty and Chesterton Meghraj)

    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.

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