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Gulf investors seek profits in India and China

Cash-rich Gulf-based funds are ploughing billions of dollars into real estate in the fast-growing economies of India and China, lured by eager regional and municipal governments and the promise of double-digit annual returns. The economies of China and India are growing at an annual rate of about 12%. US investment bank Merrill Lynch expects India’s property sector to expand to $90 billion by 2015 from $15 billion in 2005.

Mumbai: attractive to Gulf-based funds

Recent entrants include the $6 billion Dubai investment firm Istithmar, and two Bahrain-based investment houses – Arcapita and Gulf Finance House. Emaar MGF, a joint venture between Emaar Properties PJSC of Dubai and MGF Development of India, is planning a Rs60 billion ($1.5 billion) initial public offering slated for the booming Bombay Stock Exchange. Another regional investor trying to get closer to the action in emerging Asia is Global Investment House. The Kuwait-based investment company, which controls four global real estate funds managing a total of $400 million, recently made its first investment in India, picking up a parcel of land near Mumbai’s crowded airport – a region called Navi, or "New" Mumbai, for $50 million. It’s also on the lookout for land acquisitions across China.

Global Investment was careful to pick a good partner in both countries. China and India are hardly renowned for their transparency or adherence to often fungible market regulations, and new market entrants should pick their domestic ally with a generous dollop of care and thought.

When the Kuwait-based finance house recently bought the Navi Mumbai plot, its partner and adviser, Cushman & Wakefield, handled both the large and the small print, gaining the correct certifications from several regulatory bodies, including the finance ministry and the Industrial Development Corporation of Maharashtra, a unit of the Indian province overseeing the redevelopment of Navi Mumbai.

With Indian and Chinese central and provincial governments renowned for their ability to manufacture lashings of red tape before rolling foreign investors up in it, many ask whether it’s worth taking a punt on either property market. To any real estate professional – indeed any financier or entrepreneur – it’s a case of whether the reward sufficiently outweighs the risk.

In this case, the answer is probably yes – so long as the right partner is chosen. While the US and European markets (and to a large extent such markets as Japan, Korea, Hong Kong and Singapore) largely offer a rather nasty dual partnership of high rents and relatively low returns, Global Investment House, among others, expects returns in India and China to rise at an average clip of 20%-plus a year for many years to come.

"With India and China, we’re getting something that is worth one dollar today, and we will get out at two or three times that level in two or three years’ time," says a Gulf-based investor.

"Too many people in India are shying away from the market at the moment," he adds. "Two or three years down the line they will be wishing that they had made the investment – but they weren’t prepared to take the risk. To win here, you need to be ready to take on the risks. If you are prepared to do that in these markets, you get excellent value for your dollar."

Very different markets

China and India are different in every imaginable way – particularly when it comes to real estate. India splashes out a miserly 3.5% of its GDP on building out its infrastructure. Virtually nothing that New Delhi needs in order to construct a developed nation has yet been built – no toll roads or new airports, no special economic zones or the thousands of malls, commercial centres or residential compounds the country desperately needs to house its growing populace.

Greenfield real estate is where the action will be for foreign investors, and thus where investors from the Gulf region are headed. "India is such an underdeveloped market," says the Gulf-based investor. "There’s a huge need to create quality real estate, housing schemes and commercial space. The demand is certainly there."

China is completely different. Thanks to an infrastructure budget that regularly tops 20% of GDP, Beijing has managed to spend the past 20 years basically levelling and rebuilding the entire country. The result is that it has a vast array of complete or semi-complete buildings ripe for the picking.

To be sure, the economies have some common characteristics. In real estate and elsewhere, each boasts – if that is the right word – immensely opaque and bureaucratic institutions that make it hard to know when a deal has been agreed (even after the signing ceremony). Both are also very socialist-minded countries – China in word; India in agrarian deed – and are thus immensely protective of their land. In India more so even than China, gaining titles and deeds to a parcel of land can take years.

Yet as a further sign of the confidence that Gulf investors have in India and China as well as another emerging Asian nation, Vietnam, many are divesting capital away from so-called old world investments, and pumping into south and east Asia. Istithmar Hotels, a division of the UAE-based investor, plans to open eight new budget hotels across Indian cities over the next four years.

Global Investments is also reallocating its bundle of investments. Five years from now, its capital weighting will be split 60% Middle East and Asia (mostly India and China) and 40% old-world Europe and the US, reversing the current investment allocation. The Gulf Cooperation Council, a group of countries including, among others, Saudi Arabia, Bahrain, Qatar and Kuwait, doesn’t want to be behind the curve when focusing on these new markets.