"The Indian Real Estate market has not even reached 20% of it’s potential. Any investment in real estate here is bound to be profitable!" This statement clearly sums up the Indian Real Estate market. Going by the recent trends in the Indian property market, it's not only booming, but growing by leaps and bounds. Research data estimates that the Indian Real Estate market is expected to grow from the current 14 billion dollars to a whopping 102 billion dollars in the next 10 years.

Since 9/11 attack in the US, investments in Indian markets have gathered pace. India has encouraged NRIs and foreign investors with tax incentives and relaxation of foreign direct investments (FDI) rules. The dramatic change in sentiments is clearly visible in India’s bulging foreign exchange reserves, which are at a record high of over 250 billion US dollars. And the Reserve Bank of India has further relaxed the rules for NRIs with respect to repatriation of foreign exchange on real estate investments. Besides being a safe destination, India offers 15 to 25 per cent returns, perhaps the highest in the world. 30 per cent of all high major real estate transactions in Mumbai are accounted by NRIs.

Moreover, with increasing volatility in stock markets and falling interest rates, many investors have started considering investment in commercial and residential properties. The bottom-line is that this is the time to go shopping for property; as the market has started firming up already. As the organized market develops, real estate as an investment is one of the better options available today. In fact the main growth thrust is happening due to favorable demographics, increasing purchasing power, existence of customer friendly banks and housing finance companies, professionalism in real estate and favorable reforms initiated by government to attract global investors.

So which would be the potential growth areas to look for? The main growth sectors include residential real estate, commercial real estate, retail sector, industrial sector, hospitality and healthcare sectors. The commercial real estate sector is led by the booming IT/ITES industry. Estimated demand from this sector alone is estimated to be 150 million sq. ft. of space in cities throughout India by 2010. In residential real estate, there is a shortage of almost 20 million units, of which 7 million are in urban India. The increasingly organized retail sector is also a magnet for growth. With Mukesh Ambani controlled Reliance Industries and many other top industrial houses entering into organized retail in a big way, the growth potential is enormous. There has been a mushrooming of retail projects all over the country. The real estate investment sector has never had it so good. But it was not always like this.

Ever since India started liberalizing its economy, the international property investors' refrain has been that though the country opened up its most crucial infrastructure sectors to foreign investments, it is still reluctant to allow FDI in the property market. The government justified this by citing political and security compulsions. However, realizing the huge investment potential in India, Chesterton Meghraj estimates that the country will require investments of $24 billion over the next five years and that development of the real estate segment is crucial for its economic growth. The same belief led the erstwhile NDA government to permit as a part of the budget proposal, FDI in township development, IT parks, SEZs and hospitality sectors.

But many feel the liberalization was half-hearted. For instance, though the new policy allows a 100% FDI stake in a venture - which, incidentally, is allowed in few sectors - there are stumbling blocks in the form of clauses, such as a minimum lock-in period of three years before original investment can be repatriated, and a project completion mandate that a minimum of 50% must be completed within five years of possession of land. This is why there were few proposals in the initial years. But over the last six months, a slew of foreign construction groups have been seeking government clearance to invest in the country.

Moreover, land in India is mostly freehold land. In fact, certain important markets like Mumbai are seeing a dramatic increase in land availability as textile mills lands in the heart of the city are opened up to redevelopment. The other big opportunity, say industry sources, is the involvement of state governments in large-scale government projects like development of the surplus land of Mumbai Port Trust or that of sick public sector firms. State governments have realized that they can make more money if they get into joint ventures with private developers than just selling the land. This is an ideal opportunity for foreign investors because such arrangements reduce entry-level costs.

But not all real estate investments are so easy. In India, it is very difficult to find large plots near big cities. Foreign investors prefer to stick to larger cities because returns there are more lucrative. Moreover, a minimum lock-in period of three years from completion of a project is mandated, which nullifies an investor's flexibility to play around with the time frame or phasing the project when circumstances get beyond control. The other problem that acts as a dampener for foreign investors is the insistence of local financial institutions on a personal guarantee from property developers over and above the land as collateral. Another problem is that local banks and financial institutions also tend to loosen their purse strings when property prices are rising because that raises the value of their collateral, but when prices fall, they pull out, triggering a bust.

Still, all agree that the potential of India's real estate sector is huge. It is one of the most attractive markets for two reasons. One, with a billion-plus population, the opportunity is huge; no other market is going to witness this kind of growth both in commercial as well as residential and retail markets. Two, the industry has an average rate of return on capital in excess of 30% and it is not unusual for local developers to achieve IRR of as much as 50%. Clearly, India rocks in real estate. You cannot disagree.

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