Home > Hot Investment Properties

FDI contributing to an organized Indian real estate
 
Foreign Direct Investments (FDI) in the real estate sector in India would contribute towards making the sector more organized. Besides increasing professionalism in the sector, it would bring in advanced technology and help in the creation of healthy and competitive market environment for both domestic and foreign investors.
 
India’s claim to be one of the fastest growing economies in the world is best proved by the increasing number of countries showing interest to invest in the country as India is considered a stable country for investments by the overseas corporate market. This encouraging trend is further accelerated by the government’s decision to liberalize policies on the foreign direct investments (FDI) in India in the real estate sector.
 
With the amendment of the Indian government in March 2005, FDI was relaxed upto 100 per cent in the construction business. This amendment has cleared the path for foreign investment to meet the demand into development of the commercial and residential real estate in India. It has also encouraged several large financial firms and private equity funds to launch exclusive funds targeting the real estate sector.
 
FDI in real estate on the high growth path

Foreign Direct Investments (FDI) in Indian real estate is currently on the high growth path. Study on Future of Real Estate Investment in India brought out by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) says real estate market in India is growing at the rate of 30% p.a.

Industry experts are of the view that, FDI’s share in domestic real estate market will shoot up by at least 10% by March 2007 and touch about 26% level from 16% of fiscal 2005-06. This growth comes in view of growing interest of global real estate players into Indian real estate market and increasing demand of office space particularly in IT & BPO sectors.

A fierce and healthy competition is also expected to emerge between domestic and overseas investors. ASSOCHAM’s Study on Future of Real Estate Investment in India forecasts that of estimated US$ 60 billion future market size of real estate business in India, the share of foreign investments will be within the range of US$ 25-28 billion by 2010. The overseas investments will also be finding larger space in Indian SEZs and increasing number of shopping malls that will naturally fatten their share in real estate market.

In 2003-04, India received total FDI inflow of US$ 2.70 billion, of which only 4.5% was committed to real estate sector. In 2004-05 this increased to US$ 3.75 billion of which, the real estate shares was 10.6%.

However, in 2005-06, while total FDIs in India were estimated at US$ 5.46 billion, the real estate share in them was around 16%. The Study, nevertheless projects that in 2006-07, total FDIs will touch about US$ 8 billion in which the real estate share is estimated to be about 26.5%.

FDI in Indian Real Estate

In 2003-04, India received total FDI inflow of US$ 2.70 billion, of which only 4.5% was committed to real estate sector. In 2004-05 this increased to US$ 3.75 billion of which, the real estate shares was 10.6%.

However, in 2005-06, while total FDIs in India were estimated at US$ 5.46 billion, the real estate share in them was around 16%. The Study, nevertheless projects that in 2006-07, total FDIs will touch about US$ 8 billion in which the real estate share is estimated to be about 26.5%.

Indian Economy makes headway with record FDI

India is poised as the most favorite FDI destination in South East Asia, outpacing China. With the opening up of different sectors to add to its economic growth, India’s FDI inflow in the first half of this fiscal is an upwards of Rs.11, 460 crore. This includes investments by top-notch companies including DSP Merrill Lynch, Barclays Bank and Mauritius-based TH Holdings.

Though most FDI investments were in the services sector amounting to 8955.88 crore; manufacturing sector had investments FDI worth Rs. 1,133 crore. Mahindra & Mahindra was at the helm of things as foreign financial investors made investments worth Rs. 260.6 crore. Mauritius-based TH Holdings was not far behind, with an investment of Rs.1697.35 crore.

But Indian real estate sector was capable of attracting satisfactory investments, by attracting sizeable FDI. The collective investment for real estate and construction sector was to the tune of Rs. 1,252.79 crore. Prominent among them is the Rs. 321.70 crore investments by Mauritius-based IREO Investment Holding which can be considered the highest FDI in the sector. All these gives us a promising picture of large scale growth and development for the economy of India.
Foreign Investments flood Indian real estate
 
As opportunities in India grow, major asset management firms from abroad are investing in the local Indian market. The real estate market in India is flooded with overseas funds. Industry sources say over 90 foreign investors are already in the country tapping investment avenues.

Real estate Management Company, Cushman and Wakefield confirms that figures are expected to touch $10 billion in the first half of 2007. This comes with Ayala of the Philippines, Signature from Dubai, Och-Ziff Capital, EurIndia and Old Lane entering Indian real estate market shortly. FDI from Malaysia is expected to be sizeable, and UK, US, Israel and Singapore are likely to start their India operations soon.

Foreign institutional investment (FII) is expected to have over 75 first time investors. Signature from Dubai has a $650 million investment plan for the UAE and India, Duetsche Asset Management and Actis are actively setting up teams to start investing in real estate in India. Carlyle, Blackstone, Morgan Stanley, Trikona and Warbus Pincus are vigorously exploring investment options too.
 
The latest news in Indian real estate is that 150 overseas private equity funds have teamed up with real estate developers in India. Moreover, a total of $10 billion has already been raised through the same route and is expected to put into the development process within the next two years. Real estate experts predict that the realty sector will witness $90 billion worth investment by 2015.

FDI inflows rise 92% in just four months

India as the best bet for real estate investment has been confirmed by the reports on the recent trends in investment inflow during the last few months. Recent, liberalization of FDI in the real estate and retail sectors has also opened up the prospects of more and more investments into the country.
 
On one hand where FDI in construction in real estate has opened up the door for developers from around the globe to invest in real estate development in India, it has also brought about a competitive environment in the Indian real estate market, procuring the investors with quality constructions.

Also, FDI in retail has provided new business opportunities in India for global brands to acquire a market share of their products. Rationalization and liberalization measures in the FDI policy has resulted in a surge in the inflows into such sectors creating opportunities for foreign investors and NRIs to invest in India.

• Similar to bonds.

• Offering a regular return on investment, if the property is rented, as well as capital appreciation.

Of course, like all other investment options, real estate too has certain risks attached to it, and they are quite different from the ones involved in other investment avenues. Real estate investment opportunities can broadly be categorized into the residential, commercial office space and retail sectors.

In analyzing real estate as an investment avenue, a realistic assessment of the risks to future cash flow, resulting from lease expiry, has become essential today. And, as such the compensation for such risks is now more closely linked to income performance.

The projections of market players and industry analysts in this respect are worth noting. They now consider A-grade commercial office and the retail segment of realty, with a projected yield of 20-40 per cent a year, a more lucrative option than residential properties, with an estimated return of 10-25 per cent a year.

These returns / yields from different categories of properties typically depend on location, quality of infrastructure and reputation/ credibility of the developers etc.

Watch out for...

The projections of market players and industry analysts in this respect are worth noting. They now consider A-grade commercial office and the retail segment of realty, with a projected yield of 11-12 per cent a year, a more lucrative option than residential properties, with an estimated return of 5-7 per se cannot sell some units or a certain part of one's property (as one can do in the case of equities, debts or even mutual funds) in case of an urgent need of funds.
Further, the maturity period of a realty investment is uncertain. Apart from all this, the investor has to verify the property title, particularly if the investment is made in India. Industry experts believe that only persons with deeper pockets and a long-term investment horizon should invest in properties. They say from a long-term financial return perspective, it is advisable to invest in higher-grade commercial properties.

Returns from the property market are comparable with that of certain equity and index funds in the long term. Any investor looking for balancing his portfolio can now look at the real estate sector as a secure means of investment with a certain degree of volatility and risk. A right tenant, location, segmental categories of real estate and individual risk preferences will henceforth prove to be the key indicators in achieving the target yields from realty investments.

The proposed introduction of REMF (real estate mutual fund) and REIT (real estate investment trust) are likely to boost realty investments among small investors. This will also allow small investors to enter the real estate market with contribution as low as Rs 10,000.

There is also a demand by - as well as need for - different market players in the sector to gradually relax norms for foreign direct investment in it. Higher foreign investments mean higher standards/ quality of infrastructure and, hence, a marked change in the entire market scenario in terms of competition and professionalism of market participants.


The investor profile

The two most active investor segments are financial institutions. And these segments are particularly active in commercial real estate, HNIs evince interest in parking their money in residential as well as commercial properties.
The third category of investors - non-resident Indians - has a clear bias towards investing in residential properties rather than commercial properties.

This can be attributed to emotional attachment or/and the tendency to guarantee future security. As the formalities and the necessary documentation for purchasing immovable properties other than agricultural and plantation properties are quite simple and the rental income is freely repatriable outside the country, NRIs are increasing their exposure to real estate.
FDIs in realty form a small portion of the total investments as there are restrictions such as a minimum lock-in period of three years, a minimum of 25 acres of property to be developed and conditional exit.
Besides these conditions, foreign investors have to deal with a number of government departments and interpret many complex laws/ bylaws. All said and done, the government's decision to allow FDI in the real estate sector is a step in the right direction.

REIT is close to being introduced in India. But what is important is that, like most other novel financial instruments, this new concept too needs to be accepted without too many problems, except those expected to be encountered in the teething time.
REIT will be structured as a company dedicated to owning and, in most cases, operating income-producing real estate, such as apartments, shopping centres, offices and warehouses. Thus, a REIT will be a company that buys, develops, manages and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties. Some will also be engaged in financing realty.

Further, REITs are pass-through entities or companies that are able to distribute the majority of income cash flows to investors, without taxation, at the corporate level. Its main purpose will be to pass the profits to the investor in as intact manner as possible. Hence, initially, the REIT business activities will be restricted to generation of the rental income.

The investor's role is the key in situations where the interests of the seller and those of the buyer do not match. For example, if the seller is keen to sell the property and the identified occupier intends to lease the property, between them, the deal will never be fructified. However, an investor can have competitive yields by buying the property and leasing it out to the occupier.