A guide to foreign direct investment in India
Buyer beware!
The potential in India’s largely unexplored, underfunded and undercapitalized real estate sector is staggering. Mere statistics scarcely do it justice. In 2006, Merrill Lynch predicted that the property market would balloon in value to $90 billion by 2015, from $15 billion in 2005. The country’s seven largest real estate firms plan to construct 320 million square feet of residential, commercial and retail space over the next three years. This year, many of those firms went public. In the year to end-August 2007, seven Indian firms went public on the Bombay Stock Exchange, raising Rs133 billion ($3.5 billion), including a Rs92 billion domestic initial public offering by the country’s biggest real estate firm, DLF.
Foreign and domestic investors meanwhile continue to grab any real estate-related Indian stock they can lay their hands on: most listed Indian property firms’ securities have soared in value (partly boosted by the domestic Sensex market’s recent unparalleled bull run) by more than 40% in 2007 year-to-date. DLF’s Mumbai-listed stock alone has rose 47% in the two months to November 11.
Three big changes have shaken up the property market over the past couple of years. The first has been the somewhat surprising ability of leading domestic players, notably DLF and its Delhi neighbour, Unitech, to rapidly become pan-national industry players with group valuations (at least in DLF’s case) far exceeding even the market caps of Hong Kong’s largest industry players.
Next there is the emergence of several smaller domestic firms, such as Mumbai’s Lodha Group, or non-industry players that saw the property trend early and simply bought a lot of land. One example is Mumbai-based financial services firm Indiabulls, which in the space of three years went from nowhere to become India’s third-largest property firm, with a land bank of 4,000 acres, much of it prime land in the centre of its native city.
Gagan Banga, the Mumbai-based chief executive of Indiabulls Credit Services, says that people were initially scared of investing in property in India: the idea of taking on debt to buy land, or taking a risk on something, was even two years ago still a novel concept. "That’s the nature of India," says Banga. "People are scared of making big bets. We decided that instead of making a tiny bet of $10 million, we would buy $120 million-worth of land."
The final influence on Indian real estate has been foreign capital. Private equity firms, foreign institutional investors (FIIs) and pure India-focused real estate funds have pumped billions of dollars into India in recent years, and few investors or company owners in India begrudge the attention and the capital.
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"People are scared of making big bets. We decided that instead of making a tiny bet of $10 million, we would buy $120 million-worth of land"
Gagan Banga, Indiabulls Credit Services |
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Sameer Gehlaut, the chairman and chief executive of Indiabulls Financial Services, which is 45% owned by FIIs, says that overseas investors are his preferred financial partners. "Foreign investors are best," Gehlaut says. "We prefer them as good long-term shareholders. Their participation in the market is a win-win for everyone." In its 2006 study entitled India: A Real Estate Investment Future, global real estate services firm Jones Lang LaSalle noted that recent regulatory changes, the opening up of the market to foreign investors, the growth of private equity and the rising demand for higher-quality real estate were "transforming Indian real estate into a more transparent and accessible market".
It’s not all roses, of course. Indian property is not just a new asset class but a new everything. Even long-in-the-tooth Indian real estate developers are largely in the dark – about how much they should build, what they should be building, and where it should be built. Vincent Lottefier, the chief executive of real estate services firm Jones Lang LaSalle Meghraj, says that Indian property companies haven’t yet reached the phase of maturity where they have decided to be commercial real estate specialists, or to build only high-end flats or shopping malls. "They’re trying to be across everything," he says.
Most high-quality modern property in India is also anything but real. Most construction sites are just that – either half-developed projects or unbroken land. That in turn makes any projections on Indian property by both domestic and foreign investors exactly that – projections. "No one is making money yet," says Lottefier, "they’re all spending it. In most cases they won’t see any yield coming in until 2009 and beyond." And while it would foolhardy to be anything but long-term bullish on an industry crying out for capital in an economy growing at just shy of 10% a year, there are overproduction concerns already, notably in the retail sector, with thousands of malls being cranked out nationwide without regard to whether they are needed or correctly positioned.
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"It’s a very challenging environment, and there’s an enormous amount of work that needs to placed. Things are improving, and faster than we expected but it’s still a bit of a problem"
Vincent Lottefier, Jones Lang LaSalle Meghraj |
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Transparency also remains a big issue. Foreign investors have removed only a small slice of the market’s opacity. As Lottefier notes: "It’s a very challenging environment, and there’s an enormous amount of work that needs to placed. Things are improving, and they are improving faster than we expected but it’s still a bit of a problem. There’s a lack of reliable data, uniformity or standards. What is determined as being a square foot, or net growth, what does ‘management’ mean? We don’t know – we never see open books."
Yet having been denied capital for so long, India’s real estate firms are trying to make up for lost time. Emaar MGF, a joint venture between Emaar Properties PJSC of Dubai and MGF Development of India, is planning a Rs60 billion ($1.5 billion) Bombay IPO, with Pune-based Kolte Patil Developers set to launch its own Rs250 million initial stock sale. Other IPOs are expected in 2008 from the likes of Bangalore-based Empire Land Construction and the Lodha Group.