FDI in real estate to grow by 10 pc by March'07

New Delhi, Nov 19: With the demand for space particularly in the IT and BPO sector increasing, foreign direct investments in the domestic real estate market are expected to zoom by 10 per cent by March 2007 to touch 26 per cent.

The overseas investments will also be finding larger space in Indian SEZs and increasing number of shopping malls that will naturally increase FDI in the realty market, adds findings of the study on ''Future of Real Estate Investment in India'' brought out by Assocham.

The domestic real estate market will reach 60 billion dollars by 2010 from the present 16 billion dollars, growing at 27.5 per cent.

It is currently growing at 30 per cent per annum, the study says.

Of the 60 billion dollars, the share of foreign investments will be within the range of 25-28 billion dollars, it estimates.

The study projects that in 2006-07, total FDIs will touch about eight billion dollars in which the real estate share is estimated to be about 26.5 per cent.

In 2003-04, India had received total FDI inflow of 2.70 billion dollars, of which only 4.5 per cent was committed to real estate sector. In 2004-05 this increased to 3.75 billion dollars of which, the real estate share was 10.6 per cent. However, in 2005-06, while total FDIs in India were estimated at 5.46 billion dollars, the real estate share in them was around 16 per cent.

Leading international investor Royal Indian Raj International has plans to invest 2.9 billion dollars in the real estate sector in India. Blackstone Group and Goldman Sachs will invest one billion dollars each while Emmar Properties will bring in 800 million dollars to the real estate sector in India.

Pegasus Realty (150 million dollars), Citigroup Property Investors (125 million dollars), Lee Kim Tah Holdings (115 million dollars), Morgan Stanley (70 million dollars) and GE Commercial Finance Real Estate (63 million dollars) have also made plans to invest in the sector.

The study also indicates that office property market in India will witness a further boom. The requirement for office spaces alone will grow to over 19 million square feet in 2006-07 from four million square feet in 1999-2000. Nearly 75 per cent of this demand will alone be needed by IT and BPO sectors and by 2010, the sector would required 200 million square feet of space in major metros.

India will have a demand-supply gap of 17.9 million housing units by 2010. Capital values in residential sector have risen by about 25-40 per cent per annum in the last 2-3 years. According to 10th Five Year Plan, there was a shortage of 22.4 million dwelling units out of which more than 70 per cent dwelling units were for middle and low income brackets.

Additional requirement of housing per year during the plan period 2002-2007 had been estimated at 4.5 million units per year.

The chamber also holds that the number of malls in Kolkata, Mumbai, Bangalore, New Delhi, Hyderabad and Pune will grow to 300 by 2010 as against their present strength of 50. In terms of total area, there was 12.40 million square feet (mnsqft) of mall space available in these cities.

The retail market in India has been growing due to increasing demand from retailers, higher disposable incomes and shortage of quality space as on date. The capital appreciation in this sector is close to 20-35 per cent per annum. The organised retail segment is expected to grow from a mere two per cent to 20 per cent by the end of the decade.

The SEZs is are the new destination for real estate investors.

Of around 150 approved SEZs, 85 are in the IT/ITEs area and 10-15 in the electronics area. The real estate developers are developing nearly 130 SEZs, constituting 50 per cent of the total SEZ area.

However, the manufacturing and engineering sector has just 17 SEZs in the approved category based in Haryana, Karnataka, Punjab, Maharasthra, Andhra Pradesh and Gujarat.

According to Assocham, IT SEZ could be developed and made operational within a period of six months from the date of notification. Thus over 130 approved IT sector SEZs would immediately result into an investment of nine billion dollars to 12 billion dollars, resulting into massive employment generation.

IT companies are using SEZ units for EPOs (Engineering Process Outsourcing). The world class technical training that these IT companies will require, impart to its employees would ignite knowledge revolution resulting into exponential progression of our economy, it says.

The study also says that the massive flow of FDIs in Indian real estate sector has started growing as China's real estate market is reaching its saturation and foreign investors prefer to invest on freehold land, which is available more freely in India.

The study has, however, pointed out that stringent clauses are still restricting free flow of FDI in Indian real estate markets.

Given the internal rate of return on capital investments in India, the country should have attracted far more FDI than what it has until now. But lack of flexibility in policy is a constraining factor.

The study supports the introduction of Real Estate Investment Trust (REIT). ''This would result in increased rental housing generation and also raise cheaper funds for this sector. REITs would also provide an opportunity for small investors to access commercial property returns (at present nine per cent to 10 percent per year) that are now unavailable without significant capital outlays,'' it says.

REITs could also foster improvement in investors' portfolios by diversifying the investment base and increasing the stability of income sources. Instruments like equity, mortgage and hybrid REITs can offer investors high yields as well as liquid methods of investing in real estate.

The establishment of a REIT industry would provide a much-needed capital infusion to India's underdeveloped real estate market. There are numerous sources of capital that would welcome a REIT investment option.

India's GDP is currently about 850 billion dollars and is growing at an average rate of 8 per cent. Household savings are growing at an estimated 15 per cent, and this source of investable capital should reach 392 billion dollars by 2010, the chamber says.

UNI