Date:27/06/2006 URL: http://www.thehindubusinessline.com/2006/06/27/stories/2006062703271500.htm

Back Indian real estate, a big bargain for foreign investors

Deeptha Rajkumar

UBS hosting meet on Thursday with private Indian real estate cos

Mumbai , June 26

Indian realty appears to be truly going global, with many overseas investors looking to cash in on the burgeoning property scenario. Interestingly, this is in spite of the sharp run-up in property prices over the past several years and the steep rally on the stock market (before the sell-off).

Despite suspicion of a bubble, foreign investors believe Indian real estate to be a bargain with initial yields north of 15 per cent on developments and 10 per cent on acquisitions. While accepting that higher yields are not without risks, they believe that some of these risks are built into the high yields that can be found in emerging markets.

To provide an insight into the Indian property market, UBS Investment Research has decided to host a meeting with private real estate companies on June 29, to coincide with the last day of the real estate investment world conference in Singapore.

CLSA report

Citing the heightened activity in Indian real estate as a result of higher prices and genuine improvement in underlying demand conditions, a CLSA Asia-Pacific report maintains that an excess of $5-billion worth of funds is to be invested in the domestic market.

"Traditionally, Indian property market has been largely residential market and this segment still continues to be the most significant portion of the overall market. However, this is now changing with the emergence of IT/ITES sector and organised retail as big growth drivers," the report said.

Citigroup findings

A Citigroup Research report on real estate investment trust (REIT) strategy has identified over $15 billion of capital raised by opportunity funds targeted at India.

Identifying IT office space as the most straightforward investment option given the strong demand and defined rental rates of about $8-10 per square feet per year, Citigroup reports that India may need $1.5 billion of IT office space and a few billion more of other development.

As per UBS Investment Research, residential development should generate the most growth. The report cites a McKinsey and Co/National Council of Applied Economic Research study on new housing demand in India, which forecasts demand for 4-6 billion square feet of new residential housing by 2015.

UBS estimates office market in India has doubled over the past three years to 100 million square feet, an implied CAGR of 26 per cent. Demand is estimated to grow at an annual rate of 20-25 per cent over the next 10 years, which equates to 500-650 million square feet. It also anticipates India's favourable demographic trends to improve retail sector.

Citigroup on the other hand is of the view that while a substantial amount of retail is being built, identifying the best retail option is difficult as one must consider extremely low retail per capita, restrictions on entry by foreign retailers and challenges of design/layout of planned retail.

Industrial market

While the industrial real estate market in its current state is perceived as the slowest to develop, it has been pegged a growth area and should ultimately provide attractive opportunities for US industrial REITs.

In March 2005, the Union Government allowed FDI in real-estate development sector under automatic approval route for large projects. That the Government has not yet passed any form of real estate securities legislation remains an area of concern for the overseas investor.