India well positioned for surge in real estate

NEW YORK — Real estate investment trusts don’t exist in India, but investing in real estate there shows great potential, according to executives at Deloitte Touche Tohmatsu. “‘REIT’ in India stands for ‘real estate investment tourists’ … we’ve had so many,” said Kalpana Jain, a senior director of Deloitte Haskins & Sells in New Delhi, a member firm of Deloitte Touche Tohmatsu of New York. Even though REITs have not yet been established in India in the way they have in the United States, property investors abound, she said in a webcast the firm hosted last Tuesday. As a result, the Securities and Exchange Board of India is nearing regulatory clearance for something like a REIT, called a real estate mutual fund, that was proposed in June 2006. Real estate funds would fall under India’s mutual fund regulation, be listed on the stock exchanges and have to report net asset values daily, Ms. Jain said. Real estate funds would provide foreigners the opportunity to invest directly in properties and mortgage-backed securities, as well as the equity shares, bonds and debentures of companies that developed property in the country, she said. “Indian and overseas players have already raised close to $1 billion worth of real estate funds for investment through [real estate] but await regulatory clearance,” Ms. Jain said. Developers such as Gayatri Projects Ltd., Tantia Constructions Ltd. and Parsvanath Developers Ltd. have received positive responses to their initial public offerings. Additionally, public-sector undertaking banks have doubled their real estate lending over the past few years. Lending shot up 102% to $35 billion in 2005 and 2006, from $17.57 billion in 2004 and 2005, Ms. Jain said. Also, Deloitte expects that private equity may bring in another $6.81 billion to the residential-property market by 2008. In the last two years, private-equity investors have committed $2.27 billion. Growth is expected in residential, retail and office sectors due to the country’s growing population, rising incomes and the shift to nuclear families from extended families. In fact, the National Council for Applied Economic Research in New Delhi estimated that the total number of households in India will increase to 221.9 million in 2010, from 204.3 million units in 2006. The strength of the economy has spurred the real estate expansion, Ms. Jain said. “[Information technology] has really been the impetus that has pushed the real estate sector,” she said. The development of IT as a cornerstone of India’s economy requires the development of office space, which is expanding to smaller cities due to a space crunch. Along with the expansion of offices, there has been an expansion in the number of housing units, Ms. Jain said. Furthermore, the increase in business lures visitors to India, in particular to technology hubs such as Bangalore, which suffers from a shortage of hotel rooms. Indeed, on a recent trip to Bangalore, Dorothy Alpert, the national leader of Deloitte’s real estate, hospitality and construction industry group, said she was surprised at how difficult it was to find a hotel room and at the high prices charged to rent a room. “Rooms are very high priced,” Ms. Jain agrees. Another good sign for investors is the recent repeal of the Urban Land Ceiling Act, which limited the amount of land that individual entities could hold, opening the market to larger acquisitions, she said. Bangalore and Hyderabad, cities where much of the technology industry is based, are areas with the greatest demand for office space, Deloitte found. They are considered Tier 2 cities, along with Gurgaon and Pune. They are attractive investments, because Tier 1 cities such as New Delhi, Mumbai and Chennai are expensive, suffer from rising interest rates and a congestion problem, Ms. Jain said. Another possibility: smaller Tier 3 cities such as Bhubaneshwar and Kochi. “If I were to invest, I’d invest in the second-tier cities, which is where all the new businesses are coming into, like Pune,” said Manish Thakur, managing partner and chief executive of Hudson Fairfax Group LLC in New York, an India-focused investment firm, and executive director of the U.S.-India Institute, a Washington-based think tank. “There is a massive price differential [from Tier 1],” he said. “It’s a relatively new market,” Mr. Thakur said. “Real estate was not really an asset class in India until this last year. Now everybody’s looking at it as an asset class.” In the big cities, there could be a correction, because too much money is chasing too few properties, Mr. Thakur added. “But longer term, [there is] a lot of growth that needs to happen,” he said. Riva Froymovich can be reached at rfroymovich@crain.com. “Real estate was not really an asset class in India until this last year.” Manish Thakur Managing partner and chief executive Hudson Fairfax Group