The Indian real estate industry, although witnessing a boom time, is still in its infancy. This business is still dominated by regional and family-run enterprises that are under capitalized. However, the increasing scale of operations in the sector requires huge inflows of funds. With globalization in full swing, several investment companies from across the world are looking at Indian real estate market to park their funds as the risk adjusted yields here far exceed those in the most mature markets. It can be a winning strategy for private equity investors in countries like India where the real estate business is growing rapidly.
Riding piggyback on a steady GDP growth, which is expected to continue in the near future the Indian economy is witnessing a boom time. Growing job opportunities coupled with high pay packets, growing trend of nuclear families along with declining housing loan rates have all played a significant part in the real estate bonanza. It is estimated that urban housing sector would require long- term investments of $25 bn over the next five years.
Growth is expected in the emerging categories of real estate like commercial and retail space. Ashwin Ramesh, Principal of Primary Real Estate Advisors, Mumbai, says, "Indian service sector employment growth is expected to accelerate rapidly which would be roughly at 30%. The number of malls in the country is expected to rise from the current 40 to 250 by 2010". At present, 200 retail malls were either being set up or were under construction across 25 cities.
To meet the needs of increasing demand from all sectors especially from outsourcing and retail companies, it is estimated that 66 mn sq ft of commercial space would be required over the next five years. Commercial space and the residential township projects look attractive for investments as they continue to witness high capital appreciation with good returns. The returns on residential sector have been ranging between 20-30% over the past one year whereas commercial yields are around 11-12%, which is highest in Asia.
Indian real estate can expect nearly $8 bn private equity into real estate over the next 18-30 months and $1.5-2 bn foreign equity in 2006 alone. Revathi Padmakumar, Associate Director at KPMG Corporate Finance, London, says "The Indian real estate market is currently estimated at $10-14 bn and expected to grow tenfold over the next decade. One of the key attractions for private equity players is the ability to invest relatively large amounts of capital and earn returns in excess of 25%, over the holding period of such investments which is typically 5-7 years."
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