Indian Realty Sector Expected to Grow 45% in 2008

Since RBI deregulated FDI investment norms for the real estate sector in India in 2005, the amount of money in the sector has grown significantly over the years. And 2008 will be no different.

According to the Associated Chambers of Commerce and Industry of India (Assocham), the Indian realty sector is likely to see a growth rate of 40-45% in 2008. The organization expects that more than $10 billion worth of FDI is likely to flow in the sector by the end of the year. The organization also believes that the rate of growth is likely to be stable for the next three years, when it might go down a little. Also, most of the FDI investment is still predicted in the tier 1 cities.

The key points to note from the report are:

1. Growth in the Indian realty sector is here to stay for next few years.
2. Most of the growth will still happen in big cities. The tier 2 cities are getting increasingly prominent in the press but it will still be awhile before they compete with tier 1 cities for the FDI investments.
3. FDI in the Indian real estate sector will continue to grow because it provides an attractive investment opportunity for foreign investors who have hardly anything cheerful/comparable in the real estate sector in western markets.

Foreign investors have multiple ways to invest in this growth story.

In the last year, companies from this sector floated 12 public issues which included the country's largest IPO of more than Rs 9000 crore by DLF. Also, with real estate funds growing in increasing number, they provide attractive alternate investment avenue. The preferred avenue for large investors does seem to be private equity deals, though. Some of the deals are mentioned on Sify.com:

DLF sold 49 per cent stake in its seven townships to Merrill Lynch and Brahma Investments to raise Rs 1,675 crore.

The private equity deals also happened at entity level. Wachovia Corp, one of the largest financial institutions in the US, picked up 15 per cent stake in Vipul for Rs 234 crore.

Recently, one of the largest real estate firms in Mumbai also entered into a significant deal with a group of foreign investors.

The Shapoorji Pallonji group has finally struck a $290 million deal — the largest so far in the real estate space — with a clutch of foreign investors. CVC International and the Government Investment Corporation [GIC] of Singapore, along with others, have picked up a 15% stake in a special purpose vehicle [SPV] floated by the group. (Source: Economic Times)

The same report also quoted the attraction of SPV for foreign investors:

Mumbai-based real estate analyst said foreign funds continue to pour money into India, especially in FDI-compliant projects, despite concerns voiced by RBI and the government over heavy inflow.

As quoted by a source:

The SPV is the most favored route for foreign investors. Since it is almost like a new company, it helps foreign investors avoid all possible issues emerging out of existing companies.

Let's hope that the experience with the SPVs is better for the foreign companies than with the SIVs, which have been in the news so much recently.

Comments

[debussy]

The reality is that prices of real estate in India is getting clobbered.

[Ramesh]

I echo the previous comment. The blogosphere is buzzing with comments of a India real-estate bubble ready to burst. Check out my blog propertybots.blogspot.... which has links to some of these other blog articles.

[EclecticInvestor]

The Indian real estate market is a bubble. Anyone who enters today - is bound to sell in distress 3-5 years from now. This pain is at least going to last 25 years. Similar or may be worse than Japan. The Indian government is naive and the cheerleader, if not the architect, to this madness.