In India, demand and volatility

 By Shelley Emling International Herald Tribune

Early last year, the government eased requirements for foreign direct investment in real estate, granting foreign companies full ownership of projects to build communities, residential developments and hotels. For example, the government now allows overseas investors to buy plots as small as 25 acres; previously their investments had to be at least 100 acres. The government also has allowed direct foreign investment in the retail market since the beginning of 2006.

With a vast potential market of 1.1 billion people, and one of the fastest growing economies in the world, India has become a valuable hunting ground for global investors. But the Indian market still presents many risks, according to investment experts who participated Tuesday in an industry panel discussion titled "Real Estate in India: Spicing up the Market." "We've invested in China, Russia and Eastern Europe and I can tell you that there will likely be some roller coaster rides for investors in India," said Gerald Hines, chief executive officer at Hines, a privately owned global development firm. Hines, whose company recently opened offices in Delhi and Mumbai - formerly known as Bombay - said India was a very tough market to appraise. "Land prices are escalating beyond reality and you're going to see some real bubbles in India," he said. Yet all those speaking at the conference, held by the nonprofit Urban Land Institute and by Deutsche Bank, agreed that there are opportunities in India for investors who are patient and not overly risk averse.
Chris Heady, a principal at the investment firm Blackstone Group, agreed that India poses a challenge and that there have been obstacles to getting into the market. "There's a lot of volatility in respect to land prices and these prices will continue to be volatile," Heady said. "But the demand is what's compelling about India and the macroeconomic numbers are interesting." Along with China, India is leading the way among developing countries in terms of economic activity, with the country's gross domestic product expected to grow by nearly 8 percent this year.
Tobias Just, a senior economist at Deutsche Bank, said there was strong growth potential in all real estate segments in India. He said the value of the total stock of commercial real estate was expected to reach $366 billion by 2010, a $6.6 billion increase. By the end of 2008, a total of 66 million square feet, or 6.1 million square meters, of new shopping center space is expected to be built in a total of 219 centers in eight cities. When it comes to residential real estate, Just said that India would need seven to 10 million new housing units per year to accommodate the population growth and the decline in the average household size. Already the housing market has picked up considerably in recent years, with residential property prices jumping by about 25 percent last year in 10 major cities. "There is lots of potential ahead but this is still an emerging market so there are still risks," Just said, adding that it is vital for foreign investors to have a professional local partner. Just also said that India's $775 billion economy still faces major challenges, with red tape continuing to provide headaches for businesses, but he agreed that the government had done much to liberalize the economy. "India has been opening up its economy a little bit more each year and we expect the country to open its economy further," Just said. But Just also expressed caution. "Even so, the quality of the market data leaves much to be desired and transparency still lags European and U.S. standards." "The bottom line is that investors have to be careful," he said.

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