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Cross-border real estate investment in India

India’s real estate investment market has grown rapidly over the past 18 months, and following the partial relaxation of FDI regulations in February 2005, the country is now attracting substantial interest from cross border real estate investors. This report reviews the case for real estate investment in India, and assesses the current and potential future opportunities and constraints in this rapidly evolving market. We identify the key growth sectors, and as part of Jones Lang LaSalle’s World Winning Cities programme we highlight the real estate investment potential of India’s growing number of “emerging city winners”. The report concludes that: The Indian real estate market offers cross-border investors with an attractive investment opportunity underpinned by a booming and increasingly diversified economy, significant potential for rapid expansion in FDI and a maturing real estate market. It will be those investors who have a long term strategic vision and commitment to India that are likely to be the most successful. India is reaping the benefits of 15 years of reforms, and its economy is now set for a period of strong and sustainable growth. By 2010 India will be the world’s third largest economy (measured in purchasing power) and is expected to have a middle class of around 300 million people, larger than the USA. India has a large skilled labour pool, with 2.5 million new graduates added to this pool each year, most of whom are proficient English speakers with strong technical and quantitative skills. Whilst the Indian real estate market still lacks transparency and liquidity compared to more mature real estate markets, its market structure is changing fast in response to the demands of multi-national occupiers. Jones Lang LaSalle’s latest Global Real Estate Transparency Index (2006) shows that India has achieved one of the region’s most significant improvements in real estate transparency over the past three years. Moreover, the increasing participation of cross-border investors and the emergence of new investment vehicles (including the likely introduction of REITs as early as 2008) will continue to force the pace of structural change over the remainder of the decade. A significant weight of domestic and global capital is now chasing Indian real estate, but activity is currently being constrained by limited availability of high quality product. Singapore developers and US opportunity funds, which have dominated the cross-border market so far, are focusing on IT parks and residential schemes. They are now being joined by other Asian and European investors, who are currently exploring opportunities. The market will see more investment by domestic and cross border real estate funds. Suburban offices and the residential sector are likely to offer the greatest opportunities over the short term, and over the medium term opportunities in the retail sector will grow: Suburban Offices Occupier demand will be supported by a 30%+ annual growth forecast for the IT/ITES sectors. Strong growth in emerging sectors such as telecoms, financial services, pharmaceuticals and biotechnology will also boost demand and broaden the occupier base. State-of-the-art campus developments are expanding rapidly, and sale & leaseback opportunities are emerging. Residential Favourable demographics, urbanisation, rising incomes and easier access to finance are fuelling strong demand for residential accommodation. India has an acute shortage of housing, with analysts assessing a shortfall in urban areas of over 20 million units. Retail India has huge potential for retail expansion, and the sector is growing in the region of 10% a year. Organised retailing currently accounts for only 2-3% of the market, but the sector is undergoing structural change, with leading domestic retailers going through rapid growth, format migration and consolidation. Shopping centre construction is high, but most is of poor quality, strata titled and vacancy risk is high. There is huge largely untapped potential for high quality shopping mall development. Liberalisation of FDI norms will create opportunities for cross-border investors and mall developers/operators. India continues to be saddled with a number of investment risks relating to low liquidity levels, ownership and title issues, short leases and some concerns over long term asset price inflation, added to which are the broader risks of an economy vulnerable to economic shocks, infrastructure strain and environmental stress. Nonetheless, India is a vast and diverse country, and risks can be reduced by careful location selection: Tier I citiesMumbai, Delhi and Bangalore will remain the preferred option for many new market entrants, but there are fewer partnering opportunities. Mumbai and Delhi will both offer diverse opportunities; Bangalore is firmly established as a global technology hub and its economy is moving rapidly up the value-chain. Tier II cities are currently favoured – notably Hyderabad, Chennai and Pune – where there are greater partnering opportunities. These cities are proving to be highly attractive business locations, and are the increasing focus of corporate, retail and residential demand. This has not gone unnoticed by investors, and the yield gap with Tier I cities has narrowed significantly. Prime office yields in Tier II cities are in the range of 10.5-1

1.5%, compared to 9.5-10% in Tier I cities. Tier III cities “First mover” advantage can still be achieved in some Tier III cities, with office yields in the region of 12%. Kolkata and Ahmedabad, the largest Tier III cities, are displaying impressive economic dynamism. Of the smaller cities, we favour Chandigarh, Kochi,Mangalore,Mysore, Jaipur, Thiruvananthapuram and Bhubaneshwar. Goa offers good potential in the hotel and leisure sectors. However, whilst these cities are attracting increasing occupier interest, the investment markets in these smaller cities are likely to lack liquidity. Special Economic Zones are likely to be particularly attractive to cross-border players due to tax concessions and one-stop development approval mechanisms. This article is sponsored by: www.indiarealestateblog.com


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