Indian takeaway

A group of real estate professionals recently gathered in New York City to discuss the Indian property market. While the participants are eager to get involved, they also expressed some caveats. By Aaron Lovell

Towards the end of a recent panel discussion on real estate investing in India, a developer from the Asia subcontinent asked a simple, if obvious, question of the investors at the front of the room: “How much [money] have you actually invested?”

For the better part of the previous two hours, the Merril Lynch-sponsored panel—largely made up of investors who professed to be actively seeking out deals in India—had been grappling with that very question. Certainly they all wanted to invest in the country. Some of them had announced plans—or hinted at plans, in any case—and others had even sealed some deals.

But what the interrogator seemed to be getting at was why, for all the talk and all the hype, was the investment activity still flowing at a trickle?

“You can't get a more imperfect market.”

Dale Anne Reiss, the global director for real estate, hospitality and construction at Ernst & Young, chalked up much of the investor hesitation to India's lack of infrastructure. Starwood Capital head Barry Sternlicht agreed, speaking at length about the differences between India and China, that other real estate Shangri-La.

Even attempts by the Indian government to privatize infrastructure projects as a means to spur investment activity are short-sighted, Sternlicht argued. A developer with no subsidies from the government might build a two-lane highway to earn a yield for an investor, he said. Meanwhile, over in China, the government would move an entire town to build an eight-lane highway in order to move development forward.

But it wasn't just infrastructure weighing on the minds of the panelist. Others were concerned with government regulation: while the laws on foreign ownership of real estate were relaxed at the federal level last year, issues like non-uniform taxes across the Indian states can lead to increased black market activity and an illiquid investing environment.

Others pointed to the fact that mall developers cannot directly invest in India under the current laws, making it difficult for foreign retailers to penetrate the market. Still, said Sameer Nayar of Credit Suisse, “regulation was going in the right direction.” He cited the fact that laws had been relaxed for single-product retailers.

There was also much gnashing of teeth over the pricing currently found in the country. As it has moved into the spotlight, the value of India's land has risen in kind. Many landowners don't want to sell, holding out for that elusive payday and the promise of even-higher prices.

And it's these higher prices that are, ultimately, making it hard to develop much except for upscale projects. “You don't need 70 seven-star hotels,” Sternlicht quipped, adding his firm considered moving its European budget hotel chain into the country, but couldn't make the economics work “unless the developers gave us the land for free.”

for all the talk of high prices and regulation, the participants were all looking for deals—so there must be some sort of an upside. As the participants pointed out, India is a country of more than 1 billion well-educated, English-speaking people with a GDP expected to grow 6 percent per year for the rest of the decade. And the country has a democratic government with familiar legal institutions and accounting practices.

Meanwhile, the country's $12-billion real estate market is expected to balloon to $45 billion in the next five years, with demand for more than 20 million houses and 200 million square feet of commercial space. Add it all together and there's little surprise why the Indian real estate market is attracting investors seeking outsized returns.

In fact, many of the panel's participants are already active in the country. Ted Schweitzer's firm, Tishman Speyer, was early on the scene last year via a joint venture with ICICI Venture Funds Management, a subsidiary of India's second largest bank. Sternlicht, for one, has recently been in Delhi scouting a suitable location for Starwood's ultraluxurious Crillon franchise, while Merrill Lynch and Credit Suisse also said they were looking for, or had completed, deals.

For all the complications, the fundamentals suggest a reason for excitement. Towards the end of the discussion, Sternlicht said as a younger man he looked to real estate as the last, great imperfect market. In a lot of ways, he figured, India represents the embodiment of those ideals.

“You can't get a more imperfect market,” he said.

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