Indian takeaway

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.

CalPERS and Hines target China
The California Public Employees Retirement System, the largest public pension fund in the US with assets of more than $200 billion (€162 billion), is reportedly teaming up with US-based developer Hines to invest $400 million in the Chinese property markets, specifically focusing on development in Shanghai and Beijing. The joint venture will represent CalPERS' first direct investment in the Chinese real estate sector. Previously, the pension fund had been prohibited from investing in the region, but Michael McCook, the outgoing senior real estate investment officer for CalPERS, was able to obtain special permission from the board.

Morgan Stanley buys in Hong Kong
Morgan Stanley Real Estate has acquired a majority stake in Shama, the owner of five mixeduse residential and retail properties in Hong Kong, from the Schroder Asian Property Fund for a reported amount of HK$1 billion ($130 million; €105 billion). The existing properties comprise 233 apartments and six restaurants. The company has stated publicly that it is looking to expand its holdings to Shanghai and Macau. The Schroder investment vehicle, which closed on $306 million of equity, made its initial investment in the properties in 2001. Macquarie Real Estate Asia was appointed to advise the fund in February 2002.

Dubai Holding consolidates real estate arm
Dubai International Properties, the international real estate investment arm of Dubai Holding, has been consolidated under a new company named Sama Dubai, which will expand the company's investment mandate. Previously, Dubai International Properties, run by chief executive officer Farhan Faraidooni, focused exclusively on development. After one year, DIP has announced a total of $21 billion (€17 billion) of investment projects in the Middle East and North Africa. Going forward, the company will also target acquisitions of existing properties.

Macquarie in $125m Seoul office deal
Macquarie Global Property Advisors, the private equity real estate arm of Australian-based Macquarie bank, has teamed up with its parent company to acquire a 19-story office building in Seoul for $125.8 million (€102 million). Located in the Chung-gu district, the city's central business area, the building totals 34,000 square meters of floor space. The office tower is currently under construction and is scheduled for completion in March 2007. The acquisition was made as part of a joint venture between Macquarie and MGPA's MGP Fund II, which closed last year on $1.3 billion.