Smart money flows into real estate

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Mumbai, Jan 11: Smart money may have found a new home in India’s underdeveloped property market. PricewaterhouseCoopers LLP recently estimated that as much as $8 billion of private equity will flow into Indian real estate funds over the next 18-30 months.

Real estate funds are still new-fangled in India, after Sebi allowed them in April 2004. Investors are flocking to them because these could be a more rewarding vehicle to bet on India’s computer software and back-office businesses than owning pricey stocks.

Morgan Stanley Capital International’s India IT index has quadrupled in a little more than two-and-a-half years.

In the past few years, software and call-centre firms have underpinned demand for commercial property in India. The entire country has a little more than 70 million sq ft of A-grade office space, less than Shanghai and Beijing put together.

Technology services account for 85% of India’s office space demand, says Anshuman Magazine, India MD of real estate broker CB Richard Ellis.

London-based brokerage Knight Frank LLP said an undersupplied market means that the net yield on office property in India is 11%, which is among the highest in Asia.

Add to that a 20-40% price appreciation in the past 15 months, and office space in Mumbai, New Delhi and Bangalore starts to look like a very attractive asset class. Supply is expanding, though demand is rising at a faster pace.

By 2010, technology-related work that will get ‘off- shored’ from developed countries to India may jump more than fourfold to $60 billion, says consulting firm McKinsey.

It’s reasonable to expect that in a year or two, the government will allow overseas retailers such as Wal-Mart and Carrefour SA to enter India. As hypermarkets and shopping malls jostle for a slice of the country’s total non-residential property stock, office space will get scarcer and dearer.

The Indian property market may get a further boost when Sebi allows real estate investment trusts, or REITs. A committee set up by the regulator has recommended that REITs should be allowed to be set up as mutual funds. While that suggestion is still under consideration, it has allowed high net-worth individuals, both local and foreign, to participate in the market through the private equity route.