Indian Real Estate is Absorbing Gobs of Capital

Investing in Indian real estate just got easier with the government of India last week allowing 100% investment by Foreign Institutional Investors (FIIs) and Foreign Direct Investors (FDIs) in Special Economic Zones (SEZs). Investments in these zones will also receive favorable tax treatments from the government of India.

There has been a steady shift from investments in residential properties to commercial properties, due mainly to the fact that monthly yields (rent plus residuals) from commercial properties run in the 8%-14% month range versus 4%-7% for residential properties. In addition to the higher yields, the commercial sector also offers comparatively stronger appreciation potential.

On the flip side, the commercial properties typically require relatively higher levels of investment.

What's driving the boom in Indian commercial properties? The ongoing boom in organized retailing, entry of foreign retail brands, and rapid expansion of Indian brands that must widen their reach before the big foreign players establish themselves in India.

Case in point: U.K.-based Trikona Capital, which is considering a $10 billion investment in India's real estate market. Trikona has already invested $450 million in India in the last 18 months covering two special economic zones with a total of 10 million square feet of space around Delhi.

Follow the Money

India's $1 trillion economy has grown at an average of 8.6% over the last four years and is predicted to expand roughly 9% in 2008. Some economists think India could overtake China as the world's fastest-growing economy by 2012.

A big part of that growth is coming from real estate, which is growing at a 30% clip. The sector is expected to attract $60 billion in fresh capital by 2010.

Consider this one simple fact: The shortage of homes and commercial space in India at the moment is 25 million homes, and 500 million square feet, respectively. That number is getting larger every day as more and more people enter the work force and income levels continue to rise.

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At the time of publication, held no positons in the securities menitoned, although positions may change at any time without notice.

Jay Somaney is a partner and fund manager with TSG Capital Partners, a hedge fund based in Plano, Texas, and founder of GlobalTechStocks.com, a subscription site that focuses on technology and Indian stocks (including ADRs), providing information, news and chatter. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Somaney appreciates your feedback; click here to send him an email.