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This column was originally published on RealMoney on Nov. 19, 2007 at 12:29 p.m. EDT. It's being republished as a bonus for readers. For more information about subscribing to RealMoney, please click here.

In my

first column on the prospects and opportunities in Indian real estate, I looked at the residential sector and my favorite way to play it,

Unitech Corporate Park

(listed on London's Alternative Investment Market (AIM) in addition to its home listing in India). In this column, I'll examine the commercial real estate sector, which I believe offers significant upside potential, and my favorite pure-play on it: DLF, listed on the Bombay Stock Exchange (BSE) and National Stock Exchange of India (NSE).

The Thesis

Demand for commercial real estate in India is being driven by the information technology sector and information technology-enabled services sector, which at present accounts for 70% to 75% of current demand. The IT/ITES industry employed 1.6 million people (as of the end of March), up from 430,000 in March 2001. The industry is expected to grow at 30% annually for the foreseeable future; that should keep demand for office space buoyant for years to come as well.

For the fiscal year ended March 2007, per estimates from NASSCOM (India's National Association of Software and Service Companies), revenue from the Indian IT/ITES sector were $40 billion.

NASSCOM expects revenue from the sector to hit $80 billion by March 2010. The sector will add 1.3 million employees by 2010 and the IT/ITES sector alone will need commercial space of an additional 160 million square feet of space in the next three years. Per NASSCOM estimates, commercial office demand in the IT/IRES sector will mean 340 million square feet of additional office space across the country.

The financial services sector also requires a lot of commercial office space. Financial services are growing due to rising income levels in India, liberalization within the financial sector and the growth of a credit-oriented economy. The number of bank branches for the top 18 banks in India has grown from 19,850 in March 2002 to 32,500 at the end of March 2007.

Commercial office space in India's eight major cities has increased from 26 million square feet at the end of March 2005 to 30.5 million square feet at the end of March 2006, says a report from the Indian Real Estate Association dated December 2006. Demand for commercial real estate in India will come mainly from the following metropolitan areas (Tier 1 cities), including:

  • Bombay
  • Bangalore
  • Pune
  • Ahmadabad
  • Hyderabad
  • Gurgaon
  • Calcutta
  • Madras

Other smaller cities like Cochin, Amritsar and Tirupur will be driving the rest of the demand for commercial real estate.

Another driver of demand for commercial real estate is the emerging trend of multiplexes in India. At present there are only 51 multiplexes in the country, with 193 screens and an aggregate seating capacity of 55,350. In the next five years, that's forecast by local analysts to grow to 345 multiplexes with 900 screens and an aggregate seating capacity of 260,000.

Finally, the hotel sector is driving up demand for commercial space in India. The number of tourists traveling to India has increased from 2.7 million visitors in calendar 2003 to 4.4 million visitors in calendar 2006, according to the Indian Ministry of Tourism. The IMT has estimated that by 2010, 10 million visitors will travel to India. These numbers do not take into account the amount of foreign businessmen that visit India every year, many of them several times a year.

According to the World Travel and Tourism Council, travel and tourism is one of the world's largest economic activities. The WTTC says that in calendar 2006, travel and tourism accounted for 10.3% of world GDP and that in the last three years, companies that operate in the Indian hotel sector have spent almost INR 20 billion to expand room capacity. And India will host the 2010 Commonwealth games, which will go a long way in boosting demand for this segment of commercial real estate.

The Pick

DLF is focused on the commercial real estate market in India. It's also the largest realty company in India, and recently came public with India's biggest IPO, raising INR 90 billion (or $2.3 billion) at INR 525 (or $13.30) per share (using a foreign rate of $1 = INR 39.40). The shares currently trade at $21.85/share in India and the company has a current capitalization of $37.25 billion. DLF is the dominant player in the Indian commercial and retail (malls, cineplexes and strip malls segments), and just applied for a listing on the London Stock Exchange's AIM.

DLF has a land bank (current land holdings) of 14,000 acres, with a saleable area of 615 million square feet. The company has already completed development of 224 million square feet as of the June quarter, including Special Economic Zones (SEZs), IT parks, commercial, retail and residential projects.

The company intends to maintain a perpetual land bank reserve of at least 500 million square feet going forward. The company has just been awarded a 9,100 acre project from the Bangalore Metropolitan Region Development Authority to build a township about 30 kilometers away from Bangalore. The new city will be called -- wait for it -- New Bangalore.

Analysts expect the company to show revenue of $2.97 billion and earnings of $0.98/share for the year ending March 2008. For fiscal 2009, current consensus is for earnings of $1.40/share on revenue of $4.38 billion. For fiscal 2010, current expectations are for earnings of $1.76/share on revenue of $5.82 billion.

Valuations are pretty cheap when you look at current multiples for 2009 and 2010, no?

As with Unitech, I really like DLF for the next few years.

In the next column in this series, I'll discuss the opportunities that have me excited about the retail real estate sector in India.

Until the next time, happy investing.

Next: How to Play India's Retail Real Estate Boom

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Unitech Corporate Park, Bombay Stock Exchange and National Stock Exchange of India to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Somaney was long Unitech Corporate Park in India, 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 Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Somaney appreciates your feedback;

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