Real-Estate Venture Funds Flock
To India, Lured by High Returns

MUMBAI, India -- Attracted by high returns, real-estate venture funds are flocking to India, where demand for commercial and residential space is ballooning amid a robust economy and government overhaul measures.

Overseas capital flowing into Indian real estate this year will grow 40% to 45% from last year's $1.2 billion, said Gulam Zia, head of research at global property-advisory firm Knight Frank.

In a recent report, PricewaterhouseCoopers predicted that close to $7 billion to $8 billion of venture capital will flow into Indian real estate over the next 18 to 30 months.

Like traditional venture capital, real-estate venture funds invest in new properties, with a lock-in period averaging about seven years.

Since April 2004, when the Securities and Exchange Board of India allowed venture funds to invest in local real estate, some 30 foreign funds have applied to start operations in India. About half have been cleared, fund managers said.

The first domestic fund, Fire Capital, got the green light in July 2005 to raise as much as $50 million.

Interest in India's real-estate sector has increased since the government allowed direct foreign investment in greenfield real-estate projects in February 2005, analysts said. They estimate that returns in India range from 12% to 15%, compared with 3% to 4% in mature markets such as the U.S. and Western Europe.

"The appetite [for real estate] in the market is at a very high level, and there is no sign of a supply overhang. So returns could well be over 15% in this market," said Shobhit Agarwal, head of investments at global real-estate-advisory firm Trammell Crow Meghraj.

Some funds have chosen to enter partnerships with builders. In January, New York-based Siachen Capital bought an undisclosed stake in midsize real-estate developer Nitesh Estates for $100 million.

Tishman Speyer Properties, which owns the New York Times building and Rockefeller Center in New York, formed a joint venture in April last year with the private-equity arm of ICICI Bank to fund new commercial properties. TSI Venture Fund, as it is called, plans to invest close to $1 billion over the next five years.

The $250 million U.S.-based Maia started operations in India in May, and U.K.-based Dawnay Day entered in April.

Singapore's Ascendas Fund, which has developed commercial space for technology companies in the cities of Bangalore and Hyderabad, is now betting on emerging hubs in the town of Pune and the city of Kolkata.

"We started our India fund with a corpus of $230 million, which eventually swelled to $400 million as opportunities were plentiful," said Jonathan Yap, fund manager for Ascendas. "We are open to increasing the corpus as new opportunities emerge from various growth sectors."

Rising income and cheap finance have helped the growth of residential properties, but higher spending power has fueled construction of retail malls, said Mr. Agarwal of Trammell Crow Meghraj. He also said the government's move to allow direct foreign investment in single-brand retailing would boost demand for commercial real estate even further.

Still, such investments will meet only a fraction of the funding needed to develop real estate if India is to maintain its current growth rate, industry participants said.

According to the government's 10th Five-Year Plan, which ends in 2007, the country is facing a housing shortage of 22.4 million units. The plan estimates the country's housing requirement at 4.5 million units per year.

The government, which aims to provide housing for everyone by 2012, said this would require an investment of close to $800 billion in the real-estate sector by that year.

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