Thursday, January 12, 2006

Real Estate the New IT? 

In the past few months, I have met several prospective investors who have expressed an interest in India's real estate sector. This should come as no surprise since real estate funds (to funnel private equity) were allowed into India back in 2004 and REITs are currently under consideration and likely to be approved soon. Noone should doubt the untapped demand in the real estate sector, be it in the metros or in Tier 2, 3 and 4 towns. To take a small example with hotel rooms, it's assumed that Manhattan has more hotel rooms than the whole of India and that Las Vegas has 5 times as many hotel rooms as India does. The conservative estimate is that about $8-$10 billion dollars of private equity alone will flow into the sector in the next 2-3 years.

So, how big is the real estate opportunity? Does it justify all the excitement it's been generating in recent times? In fact, is it as big an opportunity as IT, as some enthusiasts point out (interestingly, part of the opportunity is being created by demand for real estate in the IT/BPO sector)? Andy Mukherjee has more.
An undersupplied market means that the net yield on office property in India is 11 percent, says London-based brokerage Knight Frank LLP. That yield is among the highest in Asia. Add to that a 20 percent to 40 percent price appreciation in the past 15 months, and office space in Mumbai, New Delhi and Bangalore starts to look like a very attractive asset class. Supply is expanding, though demand is rising at a faster pace.
It's reasonable to expect that in the next year or two, the government in New Delhi will allow overseas retailers such as Wal-Mart Stores Inc. and Carrefour SA to enter the Indian market. As hypermarkets and shopping malls jostle for a slice of the country's total non-residential property stock, office space will get scarcer and dearer. The Indian property market may get a further boost when the regulator allows real estate investment trusts, or REITs. A committee set up by the Securities and Exchange Board of India, or Sebi, has recommended that REITs should be allowed to be set up as mutual funds.
India has understood that big-ticket foreign investment in real estate will follow internationally established developers. In February last year, the government significantly relaxed investment norms for overseas developers. ``Foreign investment,'' says Magazine of CB Richard Ellis, ``will change the face of the Indian real estate industry.'' Retail participation will be the icing on the cake, though for REITs to work in India, stamp duties, which vary from one state to another, must be aligned and brought down significantly to 1 percent or so from 5 percent to 15 percent at present.