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Merrill bets on India’s burgeoning economy

Merrill Lynch has invested $377 million in the Indian real estate market, through the purchase of a 49% share of a portfolio of residential properties. The portfolio is managed by DLF, one of India’s largest developers, and comprises seven mid-income residential projects in Chennai, Bangalore, Kochi and Indore. The deal brings Merrill Lynch’s total investment in the market to $550 million.

Nipun Sahni, head of India global commercial real estate at Merrill Lynch

Nipun Sahni, Merrill Lynch: belief in the market

"This investment is a play on India’s continuing economic growth," says Nipun Sahni, head of India global commercial real estate at Merrill Lynch. Sahni was hired in January from GE Commercial Finance, where he was head of commercial property investments. The appointment underlined Merrill’s belief in the Indian real estate market. Last year, the bank forecast that the sector would grow to $90 billion by 2015, from $12 billion in 2005.

Sahni points to three key factors behind escalating demand. First, the growing economy is driving real estate demand. Every sector is chipping in but the champions of growth remain the manufacturing and services industries, where strong employment generation is contributing an estimated 70% of India’s economic growth, which is running at between 8% and 9% a year. Secondly, the average age of homebuyers in India is falling. Increasing numbers of people in their late 20s and early 30s are moving out of family homes and buying their first houses.

"In India, the culture of living with the family is very strong," explains Sahni. "But more and more young people are moving away."

Lastly, mortgage practices in India have changed significantly in the past four or five years. Whereas previously the longest mortgages on offer had maturities of about 10 or 12 years, now the norm is for mortgages of 20 to 25 years. Also, interest rates used to be in the low teens, but have dropped by about 400 to 500 basis points. In addition, several tax breaks introduced over the past few years have made owning a house in India easier.

For the time being, Merrill is targeting India’s high-growth areas. "Merrill’s investment is spread across four different states," says Sahni. "The common theme between them is high economic growth."

Merrill has partnered with DLF, because, according to Sahni, the success of real estate investments in India is not just a function of geography or asset prices but also of the quality of managers and developers. The value of a joint venture in India cannot be overestimated, as the onus on delivering on time and at the right cost lies with the developer. Everyone has the right intentions, but execution capabilities differ widely, he says.

Despite the pitfalls, India’s real estate market continues to offer opportunities across all asset classes, and Merrill Lynch is not looking to stop at a $550 million investment. "This investment reinforces our belief in this market," says Sahni. "We will continue to look for other opportunities."

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