The real estate story in India is growing bigger by the day. Industry experts believe that Indian real estate has huge demand potential in almost every sector -- especially commercial, residential and retail.

Growth in commercial office space requirement is led by the burgeoning outsourcing and information technology (IT) industry. By 2010, the IT sector alone is expected to require 150 million sq.ft. of space across major cities. It is estimated that in the residential sector there is a housing shortage of 19.4 million units out of which 6.7 million are in urban India. The increase in purchasing power and exposure to organised retail formats has redefined the consumption pattern. As a result, retail projects have been mushrooming across even B-grade cities. The retail market is expected to grow at around 35 per cent. Industry observers feel that this growth is facilitated by favourable demographics, increasing purchasing power, existence of customer-friendly banks and housing finance companies, professionalism in real estate and reforms initiated by the Government to attract global investors.

Global majors in Indian real estate

Policy changes introduced by the Government in February 2005 allowed 100 per cent foreign investments in construction projects with fast-track approvals. But the real attraction for foreign investors is potential investment returns of 25 per cent and more in Indian projects that might be hard to come by in the US and in Western Europe today. A report by property consultants Jones Lang LaSalle estimates that US$ 10 billion foreign investment will be injected into the Indian real estate sector in the next 12-18 months. International companies like Ayala of the Philippines, Signature from Dubai, Och-Ziff Capital, EurIndia and Old Lane have indicated their interest in entering the Indian real estate market soon. On the cards is sizeable FDI inflow from Malaysia, followed by the UK, US, Israel and Singapore.

Industry sources say over 90 foreign investors are already in the country tapping investment avenues. Nearly two dozen US funds are raising US$ 3.5 billion for investments in Indian realty. Those raising the funds include Wall Street powerhouses such as the Blackstone Group (US$ 1 billion) Goldman Sachs (US$ 1 billion), Citigroup Property Investors (US$ 125 million), Morgan Stanley (US$ 70 million) and GE Commercial Finance Real Estate (US$ 63 million). Others raising funds are JP Morgan, Warburg Pincus, Merrill Lynch, Lehman Brothers, Warren Buffett’s Berkshire Hathaway, Colony Capital and Starwood Capital.

In mid-2007, Morgan Stanley closed a deal worth about US$ 150 million with Oberoi Constructions in Mumbai. The Nakheel Group in Dubai entered into a US$ 10 billion deal with DLF for residential projects in Tier I and II cities. This was followed by three financial institutions -- Khaleej Finance and Investment (KFI) from Bahrain, Kuwait Investment Company (KIC) and Kuwait Finance House (KFH) -- from the Middle East promoting a US$ 200 million fund for investing in India. Called the 'Indian Private Equity Fund', it targets activities with controlled risks in growing sectors like real estate. Close on its heels, California Public Employees’ Retirement System entered India, investing US$ 100 million in a US$ 400-million real estate fund promoted by IL&FS. Ascendas, Asia’s leading business space provider is launching the first property trust of Indian assets worth US$ 500 million in Singapore in July 2007 with the renowned real estate developer Embassy Group.

Financial institutions in real estate

Indian financial institutions are competing with each other to invest in this higher return segment. Some of the prominent companies promoting real estate funds in India are HDFC Property Fund, DHFL Venture Capital Fund, Kotak Mahindra Realty Fund, Kshitij Venture Capital Fund (a group venture of Pantaloon Retail India Ltd) and ICICI’s real estate fund, India Advantage Fund. Regulated under SEBI’s (Securities and Exchange Board of India) Venture Capital Funds, these are closed-ended schemes with an initial public offer (IPO) contributing to a discount on NAVs (Net Asset Value).

The Tata group has joined hands with private equity firm, Xander, through its group company Trent in April 2007 to raise US$ 1 billion for an institutional retail real estate fund. India's top real-estate firm DLF has raised US$ 2.24 billion in the country's largest initial public offering in June 2007. It has also entered into a joint venture agreement with Indian pharmaceutical major Ranbaxy group company Fortis Healthcare to set up hospitals across the country with investments of about US$ 1.5 billion. Meanwhile, an HDFC-sponsored real estate fund has been permitted to bring up to US$ 790 million of FDI into the country, while Indiabulls Real Estate (IREL) is looking to raise up to US$ 1.2 billion.

Retailers and malls

India has emerged as the most attractive destination for retailers in 2007. According to the latest AT Kearney study, for the third year in a row, India leads the annual list of most attractive emerging markets for retail investment followed by Russia and China.

Organised retail, which currently accounts for only 4.6 per cent of the US$ 270 billion Indian retail sector, is expected to grow at 37 per cent in 2007 and 42 per cent in 2008, according to India Retail Report 2007. The report adds that organised retail in India has the potential to add over US$ 45 billion business by the year 2010.

This is expected to create a demand for around 220 million square feet of retail space by 2010. According to industry estimates, 27 million square feet of organised retail space is currently available. Another 90 million square feet is expected to be added by 2008 from 263 mall projects. Of these, 18 million square feet is slated to come up in Delhi as well as in Mumbai, 9.5 million square feet in Ludhiana, 6 million square feet in Chandigarh and 3.6 million square feet in Ahmedabad.

With the retail sector experiencing a boom, the country is witnessing a spurt in extremely large retail spaces. Shopping malls with over 1 million sq ft of space have become the order of the day. About 20 of these are now at various stages of construction across the country. In the National Capital Region (NCR), Unitech's Great India Place has a million square feet (sq ft) of retail space. In Mumbai, at least eight malls covering over 1 million sq ft each include R-Mall at Ghatkopar, and two 1 million sq feet plus malls proposed for Thane. In Bangalore, at least three malls with similar dimensions are under development. Ludhiana will soon have a 1.6-million sq ft mall by As the competition in the market intensifies, builders are going out of their way to be different. Specialised malls, designer brands and multi-movie options are marking the shopper's day out. Gurgaon, on the suburbs of New Delhi, has a jewellery mall and will soon have an auto mall. Bangalore will get an exclusive furniture mall. Two malls, first of their kind, targeting foreign tourists, will come up at tourist hotspots--Goa and Udaipur--with a projected cost of around US$ 22 million each. A furnishings mall is coming up on Elgin road in Kolkata. And India's largest theme amusement park, Noida Entertainment City (E-City), will stand upon 150 acres approximately. Discount malls are also on the rise. Top realtors and local retail chains are developing malls in regional boroughs, specifically to sell premium branded goods at prices 30 to 40 per cent cheaper than the maximum retail price. At least 50 discount malls are expected to come up in the next two years across the country, positioned in the middle-to-the-premium end of the market.

In what could perhaps become a trend in the booming retail business, Reliance Retail, Future Group and Bharti-WalMart are among leading retail companies that are acquiring housing societies and colonies in Ahmedabad to knock down and build mega-retail stores.

Big deals in realty

The biggest mall of the world--Mall of India--planned by DLF Universal along NH-8--will have 32 acres spanning a huge entertainment area and large city town squares offering a total retail experience.

Chennai, on the radar of foreign real estate funds, recently witnessed two big-ticket property deals. AIG Real Estate Fund and RMZ Corporation purchased an 11-acre plot at Guindy for US$ 686.9 milion and Shyam Kothari, in another deal, bought IDBI's 2.5 acres Boat Club property in Chennai for US$ 40.3 million.

Residential development

Majority of retailers are now planning to expand within the current city, and a similar percentage is willing to open new stores in other cities within India. The most confident among them are home and interior retailers and sports apparel/equipment retailers, followed by department stores and jewellery and food retails.

While the last decade saw the transition of sleepy towns like Gurgaon, Noida and Faridabad into enviable addresses, today these tier I towns, as they are called, are saturated and far beyond the means of the middle class. Naturally, the opportunity in the residential development in Tier-II and Tier-III cities--like Hyderabad, Cochin, Chennai, Coimbatore and Pune--is equally enormous.

For instance, Pune, the engineering and automobile hub of western India--about 160-km south-east of Mumbai--is emerging as a major IT centre. With sprawling software parks coming up all over the city and its suburbs, the demand for high-value apartments is growing. Beyond professionals and people looking to relocate from Mumbai or even overseas, are the older people who have sold a bungalow and want to live in spacious, easy-to-manage surroundings. Developers maintain that the bar for the super-premium luxury housing has risen from US$ 231,964 to over US$ 463,929 per unit.

If the year 2006 was marked by some of the country's biggest land deals, the future of India is set to usher in the gold rush of realty.