GT Alert

Real Estate Investment in India: A Compelling Opportunity

May 2005

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Information technology and information technology enabled services such as business process outsourcing have helped in powering the Indian economy to growth rates second only to China. Although information technology has been the driver, many other sectors of the Indian economy including real estate are rapidly developing. As an underlying macro-economic trend supporting the development of real estate in India, the Asian Development Bank expects India’s GDP to grow at 7% in 2005-2006 and that even higher growth rates of more than 8% are possible if the reforms process accelerates.

Since independence from Great Britain in 1947, India has historically pursued a socialist style planned economy. Foreign direct investment has therefore been constrained in most sectors of the Indian economy, including in the real estate sector. However, in connection with broad-based reforms initially adopted in 1991, the Government of India recently approved measures designed to encourage greater foreign direct investment in the Indian real estate sector.

Pursuant to a recent notification by India’s Ministry of Commerce, foreign direct investment in the Indian real estate sector is now permitted through the “automatic route”, i.e., without requiring the additional approval of the Foreign Investment Promotion Board. On a practical level, the foreign investor may now by-pass some of the previously required approvals, making the investment process less cumbersome.

Within the real estate sector, foreign investment is now permitted in construction and project development related to both residential and commercial development in (i) housing townships; (ii) commercial office space; (iii) hotels and resorts; (iv) hospitals; (v) educational institutions; (vi) recreational facilities; and (vii) city and state level infrastructure.

Certain guidelines exist within the reform measures:

Project Conditions

• In residential development, the minimum land area must be 10 hectares (approximately 25 acres)

• In commercial development, the minimum land area must be 50,000 square meters (approximately 540,000 square feet)

• If the project combines residential and commercial development, either one of the above conditions may be satisfied

• At least 50% of the project must be completed within five years from the date of obtaining all statutory clearances

• The project must comply with all local land use guidelines

• The sale of undeveloped land is not permitted, i.e. the developer may purchase undeveloped land but must develop the land before selling it further

In addition to the above project conditions, the following financial conditions must be satisfied:

Financial Conditions

• Minimum capitalization requirement of US$10 million for wholly-owned subsidiaries of foreign companies and US$5 million for joint ventures with an Indian partner

• Capital must be brought into India within six months of incorporation of the subsidiary or joint venture

• Holding period of three years on repatriation of any of the initial investment unless with the prior approval of the Foreign Investment Promotion Board

A surge of interest in the Indian real estate sector has followed closely on the announcement of these measures. Property consultants anticipate that there will be continued strong demand for both residential and commercial development based on the projected growth in the Indian economy. Analysts forecast that demand for additional commercial development alone will reach 63 million square feet across the country by 2009.

Both domestic and international real estate funds focused on India have announced investment plans thereby generating a great deal of interest. Large Indian financial institutions, such as HDFC and ICICI, have announced plans for real estate funds of up to US$200 million. International developers and funds from the US, UK, Singapore, Hong Kong and Dubai are actively exploring opportunities in India and international real estate funds targeting India are currently being created.

Structures for real estate investment in India are currently evolving and further clarification is expected from the government, including a possible further relaxation of the conditions detailed above. The Securities and Exchange Board of India has specifically mentioned real estate funds as an area for further development. Real Estate Investment Trusts (REITS) do not currently exist in India, but it may be anticipated that the development of REITs will play an important role in India.

A recent Goldman Sachs report predicts that India’s economy will be larger than Japan’s by 2030 and that by 2050 India will be third largest economy after China and the US. India’s population growth along with rapid economic expansion will result in a tremendous demand for high quality commercial and residential development and thereby provide a compelling opportunity for foreign real estate investors. The trends supporting India as the next “hot” real estate market are indeed promising.

This Alert was written by Shantanu Surpure in the Silicon Valley office. If you have any questions regarding the subject matter of this Alert, please contact Yusuf Safdari, Abrar Hussain or Shantanu Surpure in the Silicon Valley office, or Alan Sutin or Rajiv Khanna in the New York office, all of whom are members of Greenberg Traurig’s India Practice Group.

© 2005 Greenberg Traurig

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