News: Gulf investors primed for Indian real estate sector

(BS 07/10/2006) Dubai - Gulf Arab investors are looking to pour billions of dollars into Indian real estate, as Indian regulators ease restrictions on foreign capital flowing into the sector.

The Gulf’s oil-fuelled current account surplus will hit $227 billion this year, according to the Institute of International Finance, and that money is looking for a home.

With domestic real estate markets saturated and the West seen as increasingly hostile by some, Gulf investors are turning to India’s emerging property market.

“The opportunities in India are immense,” said Rakesh Patnaik, head of real estate investment at Global Investment House, a Kuwaiti investment bank.

“India is still a new market. It is only in the past 12-24 months that it has opened up,” he added. Gulf investors know India well.

The country’s financial centres are a short flight away and many of the professionals managing Gulf money are Indian expatriates. Their intention is to develop the projects in which India’s fast-emerging middle class will live and work.

So far the Reserve Bank of India, the country’s central bank, has restricted foreign investment in property, fearing that an influx of funds could stoke inflation. But the finance ministry worries that stalling investment could stunt India’s growth and the balance appears to be tipping in favour of allowing more money in.

“The regulators are trying to assess the risks versus rewards,” says Shuchita Mehta, an economist with Standard Chartered bank in Mumbai.

“But there is no doubt about the desire to attract more investment flows. The question is, how? Investment flows from the Gulf region are so far not that significant but we will see a quantum leap if they are permitted.”

Dubai’s Emaar Properties has announced a $4 billion scheme to build schools, hospitals and shopping malls in partnership with Indian developer MGF.

They are planning to build these across India, including in New Delhi and Maharashtra, home to the country’s commercial capital Mumbai. Other Dubai-based developers, including ETA Star and Nakheel, are eyeing residential and hotel projects.

But, as prices soar in India’s two booming cities, some Gulf investors are looking at upcoming locations for better value. These included Bangalore, Chennai and Hyderabad in the south, and Pune in the west, said Patnaik.

Global Investment is assessing residential and technology park developments in these “tier two” cities, hoping for an internal rate of return of 20 per cent.

Opinions differ about what ranks as a “tier one” city but some Gulf investors see everything outside Delhi and Mumbai as tier two.

Pranay Vakil, chairman of Knight Frank India, says the country’s most expensive apartments are in Mumbai’s so-called “Golden Triangle” district, where buyers can pay up to $1,000 per sq ft.

In Delhi, the most sought-after homes fetch about $400 per sq ft. Other cities trail in their wake, with Bangalore and Pune, where premium apartments fetch at most $125 per sq ft, competing for third place.

However, the likes of Global Investment and Emaar face challenges. Some regulatory restrictions remain: investment funds must keep their money in India for at least three years and each investment must be at least $10 million.

These measures are designed to keep out speculators, while encouraging more stable, long-term capital. Many investors are using Mauritius, which has a tax agreement with India, to register their funds.

Another Dubai company, state-owned TECOM, faces a different hurdle. Last year, it signed a memorandum of understanding with the state government of Kerala to develop a $1.2 billion technology park in Kochi. However, since then, a communist government has been elected that has voiced reservations about the deal.

The two sides held talks in late September in a bid to resolve the impasse. Other Gulf developers are watching the outcome closely.

Mehta believes that in spite of these challenges, Gulf money will soon start filtering through, because Indian policymakers increasingly recognise the need to build more homes, offices and related infrastructure.

Last year, $6-$7 billion of foreign direct investment entered India, less than 1 per cent of gross domestic product, but that should rise.

“Even $1 billlion from Gulf investors would be significant,” said Mehta.