U.S. Investors Bullish on Indian Real Estate

Anoop Dave, a real estate consultant in Philadelphia, recalls a dinner conversation he had two years ago with a senior Goldman Sachs executive involved in the firm's global real estate investments. This executive swore he would never invest in India, adding that his determination had been cemented by impressions formed after a recent visit to the country. Times change. For about a year now, Goldman Sachs' Whitehall Street Real Estate Funds have been exploring the Indian market and checking out potential investment partners. In March 2005, the firm announced it planned to invest up to $1 billion over the next two years in Indian private equity, real estate, private wealth management, and other businesses in India for its institutional clients. A month later, California Public Employees' Retirement System invested $100 million in a $400 million real estate fund promoted by India's Infrastructure Leasing & Financial Services. At last count, international funds had reportedly invested some $2.5 billion in Indian real estate. Nearly two dozen domestic funds have raised another $3.5 billion for similar investments, including Wall Street powerhouses such as J. P. Morgan, Warburg Pincus, Morgan Stanley Real Estate Funds, Merrill Lynch, Lehman Brothers, Warren Buffett's Berkshire Hathaway, the Blackstone Group, Colony Capital, Starwood Capital, etc. Rising ReturnsAll these companies are encouraged by Indian policy changes in February 2005 that allow foreign investment of up to 100% in construction development projects with fast-track approvals. The real attraction is investment returns of potentially 25% and more in Indian projects that might be hard to come by today in the U.S. and Western Europe. India's urban office space market is tiny at about 60 million sq. ft., compared with New York City's 400 million sq. ft. or New Jersey's 175 million sq. ft. (Bangalore, in southern India, has 25 million sq. ft. of office and high-tech space, of which 9 million sq. ft. was built last year.) Investors could view that as a glass half-full or half-empty.Investors from Asia have been among the earliest to jump into India's construction development industry, firming up a presence established before the latest hreforms. Large Singaporean development companies that already have projects underway in India are Ascendas, CapitaLand and Keppel Land. In June 2005, Ascendas launched its $350 million "Ascendas India IT Parks Fund," with investments in two IT parks - the International Tech Park in Bangalore and the Vanenburg IT Park in Hyderabad. Keppel Land has stakes in several IT parks across the country. Indonesia's biggest conglomerate, the Salim Group, has proposed four investment projects in West Bengal - a "health city," a "knowledge city," a special economic zone and an express highway that will account for 1,500 acres. Enter the Developer Tishman Speyer is among the first U.S. developers to invest in India. In April 2005, the New York City-based firm formed a joint development company with ICICI Venture Funds of Mumbai that will have a war chest including leverage of up to $2.5 billion. Tishman Speyer and ICICI Venture Funds are bringing in $300 million each in equity and will invest equally in projects. Kishore Gotety, ICICI Venture Funds' director of investments, says the internal rate of return net of developer margins and fees could be between 25% and 28%. He says returns were "in excess of 100%" in some markets such as Devanahalli in Bangalore, where a new international airport is being planned. He believes returns could be equally high in other locations earmarked for large infrastructure projects.So far, the Tishman Speyer-ICICI Venture Funds company has signed memorandums of understanding for two ventures in India. One is a $200-million project for residential and commercial development on 42 acres in Bangalore's prime Whitefield suburb. The project is in the final stages of due diligence, and the Tishman Speyer-ICICI Venture Funds company has struck a deal to buy the land. Gotety expects to have the residential component ready for occupancy within two years. The commercial space is expected to be ready in five years. While it will initially be leased to tenants, plans are to sell it eventually. The second project is in Devanahalli, where Tishman Speyer and ICICI Venture Funds are buying a 25-acre lot whose final use has not yet been decided, says Gotety. An earlier plan for a development project in Pune, 100 miles south of Mumbai, has been shelved for now. Brokerage Deals While many U.S. investors are still testing the waters, real estate services firms with existing operations in India are on a roll. Anshuman Magazine, managing director of CB Richard Ellis (CBRE) South Asia based in New Delhi, joined CBRE in 1994 to launch its Indian operations - the first by a foreign brokerage firm. Today, he runs operations in 66 cities in India, Pakistan, Bangladesh, Sri Lanka and Nepal from his New Delhi base, with 600 employees in seven cities. It has property management contracts totaling 25 million sq. ft. in 14 cities, and has advised on construction projects of more than 10 million sq. ft. in just the last two years. Cushman & Wakefield of New York City entered India in 1997, and the firm has since grown to offices in four cities with 350 employees. Many of its global clients have significant operations in India, including HSBC, Verizon, IBM, Lucent Technologies and Boeing. Arshpreet Chaudhry, managing director of client solutions at Cushman & Wakefield in New York City, who oversees his firm's India strategy sees big gains around the corner. "Real estate and construction development in India will have availability of cheaper, long-term capital from international lenders," he says. "Foreign developers will encourage implementation of international best practices, and prices will get competitive for better quality."