Property’s most favoured FDI destination: Residential sector

94 per cent foreign direct investments have been made in tier-I cities like Delhi, Mumbai and Bangalore
New Delhi, June 7: About $30 billion of foreign direct investment (FDI) is earmarked for real estate markets across Asia in 2007. Of this pie, India might end up getting as much as $6 billion, according to multinational real estate consultancy Jones Lang Lasalle (JLL).
In a report titled Rising FDI in real estate, JLL also lists the major FDI deals that took place during January-March 2007. Commenting on the changing trends in FDI during the first quarter of 2007, JLL strategic consulting & research division senior manager Abhishek Kiran Gupta said: “Most of the capital is being deployed in the residential sector and in mixed-used projects. Since the Reserve Bank of India (RBI) does not allow developers to utilise capital raised from banks for purchasing land parcels, capital raised through private placements, foreign investments and funds is being used for such transactions.”
Residential has been foreign investment’s most favoured asset class as exit from such investments is assured and the internal rates of return (IRR) meet investor expectations. Today greenfield projects in India offer a return of 20-25 per cent, the report adds.
Investors are also attracted to the strong commercial property yields across metros, and to the availability of quality supplies. Rentals for grade A commercial properties in tier-I cities like Mumbai and Delhi have gone up by more than 100 per cent over the last 15-18 months. While in 2006, more investments were made in special purpose vehicles (SPVs), entity-level transactions increased during the first quarter of 2007. “This can be attributed to investors’ rising confidence in the Indian real estate market,” opined Gupta.
About 94 per cent of FDI investments have been made in tier-I cities like Delhi, Mumbai and Bangalore. This is despite the high entry barriers associated with investment in these cities. The barriers include low availability of land parcels, mature markets, and a highly competitive environment due to the presence of several financially sound grade-A developers. According to the report, investment in tier-I cities in the next two to three years is expected to rise due to growing demand in these locations.
Going forward as tier-I real estate markets mature, the report notes, tier-II and III cities such as Chennai, Pune, Kolkata and Hyderabad are likely to emerge as new investment destinations.
With the RBI increasing the risk weightage on bank lending to real estate, issuing guidelines on maximum (bank) exposure to the sector and prohibiting the use of bank capital for buying land parcels, developers are looking at alternative funding options. According to Gupta, “The private equity route has and is expected to be favoured. Also, mezzanine structures have now become popular with investors. The other routes for raising capital are domestic listing on the BSE/ NSE and AIM, LSE listing.”
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