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HONG KONG, July 17 (Reuters) U.S. investment bank Morgan Stanley said on Monday it had bought into a second developer in India, where the construction industry has thrived since rules on inward investment were eased last year.

Morgan Stanley, which raised US$4.2 billion for an international property fund in March, said it had invested about US$65 million in Alpha G:Corp Development Private Ltd., a New Delhi-based property developer.

The move follows its US$68 million purchase of a stake in Bangalore-based Mantri Developers Private Ltd., announced in March.

India eased rules on foreign investment in its property sector early last year, lowering the minimum size of residential and commercial projects funded by overseas capital.

That sparked interest from several U.S. funds and firms eager to tap an economy growing at 8 percent annually but suffering from a shortfall of around 20 million homes. Development projects typically give internal rates of return of 20-25 percent.

But many investors have been hesitant, wanting to see others test India's legendary red tape before taking the plunge. Finding a local partner with a good track record can also be difficult because big, established players tend to want to go it alone.

Some private equity funds also complain that Indian companies are sticking huge price tags on themselves and their projects to take advantage of an estimated $12 billion of investment pledged by foreign and domestic funds.

Last month, Indian regulators unveiled plans to allow listed real estate mutual funds (REMFs) to set up, which would pump more money into the property market. Land prices in some hotspots such as Mumbai have jumped as much as 60 percent in the last year.

Morgan Stanley, which has been an active property investor in China and Japan, said Alpha was currently working on a retail mall, office and residential projects in northern and western India.

Indian is a top priority in Asia for many U.S. property investors because English is widely spoken and many would like to build premises for U.S. companies that are outsourcing work to the country.

U.S. developer Tishman Speyer tied up with India's ICICI Bank to pour US$1 billion into the country and U.S. pension fund CalPERS has put $100 million into a property fund. Private equity arms of JPMorgan , Lehman Brothers and Merrill Lynch are also hunting for deals.

But India's property industry is hampered by poor foreclosure laws, tedious property registration processes, tax and transaction laws that vary by state, and frequent contests over property ownership.

REUTERS CS RN1742