Indian Real Estate Industry Primer

RE A L ES T A T E IN V E S T M E N T I N IN D I A
A PRIMER ON THE INDIAN REAL ESTATE INDUSTRY
R E S E A R C H
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Title Real Estate Investment in India
Document type Research
Classification Confidential
Reference Henna Capital, LLC | Henna Associates, LLC
Version v.04
Issue date February 1, 2006
Author(s) Tabish Rizvi
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Henna Capital, LLC | Henna Associates, LLC - Real Estate Investment in India
W W W .HE N N A C A P I T A L .C O M
REAL ESTATE INVESTMENT IN INDIA
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T A B L E O F C O N T E N T S
Preface 5
Scope of the document 5
Objectives 5
Version Control 5
Pending and forecasted edits 5
1. Overview of Indian Real Estate 6
2. The Tipping Point 7
3. Prospects for Attracting Capital 8
3.1. Moderation of Foreign Direct Investment Norms in Construction and Development 9
3.2. Special Economic Zones 10
3.3. Urban Reform Initiative 11
3.4. Quality Control and Transparency 12
3.4.1. Engineer’s Bill 13
3.4.2. National Real Estate Development Council (NAREDCO) 13
4. Commercialization of Investment 13
4.1. HOUSING DEVELOPMENT AND FINANCE CORPORATION (HDFC) 13
4.2. ICICI Joint Ventures 14
4.3. Others 15
4.4. Non-Investment Firms also Supporting the Commercialization Paradigm 15
4.5. Emergence of a Formal Real Estate Finance Market 15
5. Critical Success Factors Going Forward 17
5.1. Investment Rating Criteria 17
5.2. Modern and Efficient Legal System 18
5.3. “The Tenth Plan” 18
5.4. Preparing for Global Competitiveness 18
6. Market Analysis 19
6.1. Office Market 19

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6.2. Residential Market 19
6.3. Lodging and Hospitality Market 20
6.4. Retail Market 20
6.5. Industrial Market 20
7. Appendix 21
7.1. Section (1): Commercial Real Estate, Market Prices and Rental Ranges5
21
7.2. Section (2): “Grade A” Commercial Space in India13
21

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PREFACE
SC O P E O F T H E D O C U M E N T
India’s emergence as a focal point for IT and IT-related services, as well as, the
inclination by multinationals’ to launch off-shoring facilities in the emerging markets can
be credited for giving the country’s real estate market a second chance. The recent
paradigm suggests that the country will be a hotbed for new investment as several forces
come together and help attract large sums of capital to the market.
OB J E C T I V E S
The purpose of this paper is to evaluate these prospects for global investment in Indian
real estate.
VE R S I O N CO N T R O L
Version Nature of change Date
1.0 First release May 15, 2005
1.1 Reissued with correct credentials May 24, 2005
1.2 Updated financials September 9, 2005
1.3 Issued with updates from FH&RA and HVS International study
on Indian Hospitality market
January 28, 2006
PE N D I N G A N D F O R E C A S T E D E D I T S
Version Nature of change Date

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1. OVERVIEW OF INDIAN REAL ESTATE
Real estate is increasingly becoming a more significant component of India’s
economy; the estimated size of the market is anywhere from $6 to $12 billion depending on
how the “realty” market is defined. From 2002 to 2003, real estate’s share of India’s GDP
grew from 5.25% to over 7%.1
Yet, this recent boom in Indian real estate is not unprecedented. A similar expansion
occurred over a decade ago when India’s economy was first liberalized in 1991 and the
nation experienced its first influx of multinationals. Markedly different than what is
happening today, that era was led by several fly-by-night developers who were primarily
motivated by profit-maximization and had very little commitment to the actual trade.2
The
unprofessional nature of their operations had left an irreparable dent in the market, which in
some ways is still evident in the nation’s landscape.
India’s emergence as a focal point for IT and IT-related services, as well as, the
inclination by multinationals’ to launch off-shoring facilities in the emerging markets can be
credited for giving the country’s real estate market a second chance. The recent paradigm
suggests that the country will be a hotbed for new investment as several forces come together
and help attract large sums of capital to the market. The purpose of this paper is to evaluate
these prospects for global investment in Indian real estate.
Over the next decade (2005 to 2015), we believe that several key trends will impact
the outcome of this hypothesis as follows:
Macroeconomic growth provides a backdrop for growing real estate demand
The Centre for Monitoring the Indian Economy, CIME, forecasts 7% to 8% annual
GDP growth, led by the services sector.3
Inflation and interest rates are anticipated to
remain stable for the near term. According to Forrester Research, as the off-shoring
phenomena continues, 70% of the 3.3 million U.S. jobs moved offshore are expected to
be sent to India.4
According to India’s Infrastructure report, USD $100 billion is
expected in total investment in infrastructure from 2004 through 2009.5
Projected demand for real estate in various sectors far outstrips supply
In addition to the IT and IT-enabled services sector, several major financial
companies such as Standard Chartered Bank, American Express, Citigroup, HSBC, GE
Capital, Bank of America, JP Morgan Chase, and Reuters have recognized the
advantages of India as an off-shoring destination. If others continue to follow suit, it is
expected that 400 million sq. ft. of new office space will need to be developed by 2010 in

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order to accommodate the multitude of companies seeking to expand
their business to India, requiring an additional annual investment of Rs. 10,000 crore ($2
billion USD).6, i
The Indian economy will become more service-oriented
India’s population as of the 2001 national census was estimated at 1 billion
inhabitants.2
Assuming a conservative growth rate of 2.5% per annum, India’s
population today is probably around 1.1 billion. If it continues to grow at this rate, India
will surpass China as the populous country by the year 2020 and boast the world’s largest
workforce with a median age of only 35 years old; second, only to the United States,
which will have a median age of 37 (the median ages of the workforce in China and
Japan are expected to be 40 and 50, respectively).7
While 70% of the nation’s population
is still agrarian and lives on Rs. 25 ($0.50 USD) per day, the dual impact of supporting
the world’s largest workforce should translate into urban sprawl (conceivably, leading to
the development of farmland into office parks) and engage former “farmers” into the
more lucrative service-oriented economies that exhibit higher standards of living. In fact,
by 2021, 40% of India’s population is projected to be living in urban areas.8
The future depends on the emerging consumer class
A natural extension of the population trends in India is the emergence of a larger
consumer class, currently 300 million people who will have disposable income to spend
on a better lifestyle.5
In order to accommodate this major socioeconomic progression,
significant changes in the Indian landscape will need to occur. On one end, this change
will manifest itself in the development of underutilized land that currently exists as
unproductive farmland into residences and offices where these people can live and work.
There exists a huge demand for housing and infrastructure in this way; over 30 million
additional homes are needed in order to fill the gap to achieve ‘Housing for All.’2
On the
other end, this evolution will translate into the development of major retail centers to
serve an emerging consumer class is grossly under-retailed. The India Brand Equity
Foundation (IBEF) predicts that over 200 malls with a combined space of 25 million sq.
ft. will sprout across more developed areas of the country and become a Rs. 38,500 crore
($8.25 billion USD) industry annually by 2010.9
2. THE TIPPING POINT
The real estate business in India is in its infancy and as liberalization gains more
traction in various segments of the economy, the demand for modern “world-class” real
estate will increase at an equally impressive clip; some analysts project it to be as high as
15% per annum.10
It is estimated that nearly 15 million square feet of office space is already
committed for absorption at top dollar ($8.50 USD/sq. ft. on average and as high as $56+
i
Rs 1 crore approximately equals $200,000 USD, at a steady exchange rate of Rs. 47/USD, which is the exchange rate
assumed in this paper. Rs. 1 lakh crore is another way of saying “100,000 crores,” which approximately equals $20 billion
USD.

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USD/sq. ft.) in and around the nation’s major metropolitan areas within the
next six to nine months, and 30% of this demand is expected to be from foreign
multinationals setting up call centers, back-office operations and research-and-development
facilities.11
(Appendix, Section #1) To put this in perspective, the Freedom Tower and
surrounding buildings in lower-Manhattan aim to replace approximately 10 million square
feet of commercial space lost in the September 11, 2001 terrorist attacks.12
The IT and IT-
enabled services sector, which contributed to 80% of absorption in 2003, is now being
matched by several other sectors.13
These favorable prospects are attracting a new set of developers to focus on the
development of premium properties both in and on the periphery of major metros – Gurgaon
in Delhi, and the central and western suburbs in Mumbai. These properties compete on high-
end amenities and high-class architecture that is characteristic of ‘Grade A’ office and retail
space seen in other parts of the world. The attractiveness of superior construction combined
with lower rents has motivated several companies to ditch their sub-par office space and
relocate. As a result, premium quality commercial space enjoys an occupancy rate 20% to
25% higher than inferior quality comparable space in the major cities.13
Yet, true ‘Grade A’ office and retail space, which only began emerging in limited
quantities circa 1997, still represents a very small portion of the infrastructure in many major
Indian cities. (Appendix, Section #2) The problem is that local developers are insufficiently
capitalized to develop the kind of world-class real estate infrastructure that will be sought on
a large scale by foreign multinationals moving to India. They are unable to build the type of
“expensive” real estate that is representative of the skylines in China and Japan, and as a
result, development of “premium properties” has not been uniform across the country.14
This
dearth of quality infrastructure to support India’s growth is further exacerbated by the
unavailability of external financing for real estate development. This gap is where an
enterprise that facilitates direct investments in real estate, whereby connecting local
developers with providers of capital (e.g. foreign investors seeking higher returns), can create
significant value for itself and the Indian real estate enterprise.
3. PROSPECTS FOR ATTRACTING CAPITAL
Our research suggests that there are several proposals either that have been passed or
are in consideration by India’s ‘Ministry of Commerce and Industry’ (MCI) that make the
prospects for investment in Indian real estate favorable.ii
We feel that these initiatives are
setting the stage for India to attract to attract large sums for capital (including both domestic
and foreign) to support the development of its long overdue real estate infrastructure. Given
the right set of circumstances, the commercialization or institutionalization of these capital
ii
Henna Capital | Associates has connections with both India’s Minister of Finance - Shri P. Chidambaram and India’s
Commerce and Industry – Shri. Kamal Nath through their internationally educated sons; both of whom were contacted for
the purposes of this assignment and other initiatives. Our opinions formulated throughout this paper may be a reflection of
what they may have said over the course of several phone calls.

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flows may also be in the near offing. The subsequent sections explore and
comment on these forces in greater details.
3.1. MO D E R AT I O N O F FO R E I G N DI R E C T IN V E S T M E N T
NO R M S I N CO N S T R U C T I O N A N D DE V E L O P M E N T
In February 2005, India’s ‘Cabinet Committee on Economic Affairs’ (CCEA; staffed by
members of the MCI) ratified a proposal allowing foreign entities to assume 100%
ownership of certain real-estate projects without special government approval, fueling
further optimism about the Congress party-led government's commitment to pursuing
economic liberalization.15
This ruling by India’s MCI relaxes the restrictions formerly
placed on foreign direct investments (FDI) in the country. In fact, FDI had not even been
allowed in the real estate sector in any capacity as recently as 2001; but a report
published by McKinsey & Company in that same year suggesting that India had the
potential to attract over $100 billion in FDI in the next five years may have possibly
motivated the Indian government to initially ease certain restrictions at that time.16
The
result was a bureaucratic approval process that required foreign investors to submit their
proposals to the ‘Foreign Investment Promotion Board,’ and then wait several months for
the committee to issue a ruling. In the time since 2001, only nine proposals were
approved, of which only half materialized into actual projects. 17
Now, with CCEA’s
enactment of new FDI norms, foreign investors considering construction and
development projects will be able to have their proposals cleared more quickly through
automatic channels; it may be the first step towards radically changing and reorganizing
the real estate industry in India.18
Among several stipulations, the highlights of the new legislation governing FDI are as
follows:
100% FDI is now allowed under the “automatic route” for the construction and
development of new townships, housing, commercial premises, hotels, resorts,
hospitals, educational institutions and recreational facilities. The government
prohibits direct foreign ownership of existing real estate assets, unless it is owned by
a Non-Resident Indian (NRI) outside of a “portfolio-type investment.”
Minimum land area for projects has been reduced to 25 acres from the earlier floor of
100 acres for housing projects or a built-up area of 500,000 sq. ft. for commercial
developments (e.g. office and retails). This is expected to appeal to investors who
previously felt that the 100 acre minimum was prohibitive.
Minimum investment size (i.e. capitalization) has been specified at $10 million for
wholly owned subsidiaries and $5 million for joint ventures with Indian partner. A
lock-in period on relevant investments has been fixed at three years. Also, a foreign
entity cannot repatriate any of its original investment without approval by the Foreign
Investment Promotion Board.
An investor cannot sell undeveloped plots. While 100% FDI was allowed in 2001
with prior government approval, very few projects took off (only nine projects were
approved under old norms).

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To fully understand the economic impact of this regulation, a comparison
with China’s deregulation of FDI norms may be used as a precedent. In the seven or so
years since 1997, which is when China drastically opened FDI in real estate and
construction, $52 billion (13 to 14% of total FDI in China) flowed in from foreign entities
during that period of time. In this way, real estate and construction has been one of the
leading sectors in attracting FDI in China, which single-handedly contributes to 3.2% of
the nation’s GDP. In India, the proportion FDI committed to construction and
development pales in comparison and hopefully the new policies will help change this
and FDI is more in line with McKinsey & Company’s original projections.16
The government is also considering the prospects of opening up foreign investment in the
retail sector, whereby global retail chains will be able to come and set up shop in India to
target the emerging consumer class and export manufactured goods to meet international
demand. Brett White, president of CB Richard Ellis (CBRE), suggests that this can have
a potentially major impact on real estate, as India will need to build the world-class real
estate in order to attract retailers to India. “It is very important for India to modernize its
infrastructure in order to graduate to the big leagues.” 19
This paradigm also implies
several other positive spillovers for India. The Indian real estate and construction
industry will be exposed to international standards and foreign investment by suspect
retailers (e.g. Gap) will trigger growth in local manufacturing and infrastructure sectors,
much in the way Michael Porter suggests in his research on the ‘Determinants of National
Competitive Advantage’ (i.e. the “Diamond”). The real estate industry has direct
linkages with core industries like cement and steel, which in turn has a compounded
effect on other sectors; thus, better real estate assets can be leveraged in developing the
entire economy.
3.2. SP E C I A L EC O N O M I C ZO N E S
In an effort to achieve its objective of attracting foreign direct investment and accelerate
the country’s economic growth, India’s Ministry of Commerce and Industry (MCI)
announced the introduction of 27 Special Economic Zones (SEZs) in its Export-Import
Policy (Ex-Im) issued in March 2000. The parliamentary bill behind these SEZs or
“zones” aims to provide multinational companies an internationally competitive
environment for exports. While the mandate is not exclusive to the real estate sector, it
gives foreign investors an opportunity they need to consider seriously, as the economic
spillover to the real estate industry is expected to be significant.20
SEZs are defined as “duty free enclaves and deemed foreign territories for the purpose of
trade operations, duties and tariffs.”21
The advantage of liberal trade policies combined
with the security of a domesticated legal system (i.e. American company can enforce
U.S. jurisdiction) is expected to attract several companies to India and increase the level
of investment in multiple sectors of the economy. The export-oriented design of SEZs,
through favorable tax and legal policy, make these districts attractive for multinationals
establishing new facilities in India in the following ways:
All investments in SEZs, regardless of domestication (i.e. foreign or domestic), will
be considered by the Indian government as “infrastructure development,” and

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consequently are exempt from the country’s usual foreign direct
investment norms as long as they are compatible with the current Ex-Im policy.
100% income-tax exemption for five years and 50% off the peak rate thereafter.
Exemption from capital gains tax on the transfer of a business from an Indian locale
to an approved SEZ.
Exemption from service tax on services rendered in connection with the setting up,
operation and maintenance of SEZ units.
The duty free import or domestic procurement of goods for setting up SEZ units.
100% profit and capital repatriation by an approved foreign entity.
Participants will be able to borrow up to $500,000 USD (Rs. 2.5 crores) per annum on
a pre-approved basis as part of being allowed to operate within an SEZ.
In summary, SEZs are introducing the precedent for investor friendly markets in the
country, which should further increase FDI in India.
SEZs have been very successful in China and India is modeling itself after that country’s
success. In fact, Shenzhen SEZ, started in 1981, has achieved a 38% CAGR in GDP,
which is the highest economic growth rate ever recorded in human history.21
SEZs in
India are expected to have a similarly trended impact on the country’s overall economic
growth (not necessarily 38% CAGR), which will help foster the knowledge and social
change necessary to influence the remainder of the country.
As for the impact on the real estate sector, leading global consultants like KPMG and
CBRE believe that a significant amount of infrastructure will need to be developed in
conjunction with the proliferation of these zones, both inside and outside of these
districts. In their opinion, the clustering approach and self-sufficient format being
adopted by several SEZs makes it easier for investors to analyze and underwrite a deal.22
Some caution is in order; however, as enthusiasm for SEZs may outpace actual demand
for the types of facilities that are expected to be developed (i.e. SEZ-based projects like
residential townships, technology parks, and warehouses). An understanding of the
cumulative demand may be drawn from the following statistical information:
As of March 2004, 711 business units were in operation in the eight functional SEZs
at the time and investment in these zones totaled Rs. 18,650 crores ($3.8 billion
USD).
Over one year ago, these eight SEZ units were providing employment to about 86,765
people, out of which 32,185 were females.23
This amounts to roughly 300,000 total new jobs, when all 27 SEZs are up and
running.
3.3. UR B A N RE F O R M IN I T I AT I V E
The ‘Urban Reform Initiative’ (URI) proposed in 2002, by the Confederation
of Real Estate Developers’ Associations of India (CREDAI), seeks to

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motivate the federal government to modernize India laws with respect to
land-use (zoning), stamp duties, municipal bylaws, and the imposition of realistic tariffs /
fees for the use of federal resources by on municipal bodies engaging in the development
of their region’s civic infrastructure. In our opinion, the initiative’s most important
measures include the repeal of the ‘Urban Land Ceiling and Regulation Act’, ‘Model
Rent Control Act’, and a reduction in India’s stamp duty’ to 3 to 5% of property value.2
Consistent with its goal to promote and emphasize the liberalization of the applicable
government policies perceived as obstacles to real estate investment, CREDAI has been
actively involved in lobbying against the first two measures and has had partial success,
so far.iii
Specifically, repeal of the ‘Model Rent Control Act’ aims to eliminate an archaic legal
framework that formally governed the relationship between the landlord and a tenant, in
order to help originate new leases with a more market-friendly and globally-familiar
structure. Both the ‘Urban Land Ceiling and Regulation Act’ and ‘Model Rent Control
Act’ currently await ratification by each of the individual states that will define the
specific provisions to support ongoing housing and construction activity.
The nation’s prevalent stamp duty and steep municipal/property taxes being amongst the
highest in the world, ranging from 13 to 26% of property value before the advent of URI,
has been faulted for making real estate investments in India onerously unattractive. One
reason for this is the country’s archaic assessment methodologies, which are actively
being modernized to emulate approaches used in more developed markets. In India, all
documents registered with local authorities (i.e. title, insurance binders, etc.) pertaining to
sale or transfer of assets are assessed a “stamp duty,” which vary by state. As a result,
individuals and businesses often neglect to file the necessary documentation to transfer
title at the time of a transaction, in order to avoid having to pay these steep tariffs. This
lack of record-management makes subsequent transactions even more tenuous, as true
owners are often hard to substantiate.
The government of West Bengal has shown the way and serves as a precedent for other
states in its approach to rationalizing stamp duty tariffs. It claims that apparent loss in the
Government’s tax base due to the reduction in the stamp duty can be recouped though
newly levied excise, sales, construction and property taxes accrued through related
revenue flows from increased housing, retail and commercial activity.
3.4. QU A L I T Y CO N T R O L A N D TR A N S PA R E N C Y
The emergence of several new initiatives is helping mitigate the “perceived” risk of doing
business in India and specifically in the real estate sector.
iii
CREDAI (Confederation of Real Estate Developers’ Association of India) was formed to establish a code of conduct and
ethics for all members of the organization, designed to instill trust in the real estate development profession. The goal is to
establish a universal standard and punish those businesses via damaged reputations who fail to meet such standards.

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3 . 4 . 1 . E N G I N E E R ’ S B I L L
India has sought legislation for years that has been finally passed, requiring all real
estate developers and construction companies to formally register themselves and
submit to regulation. This initiative helps weed out “fly-by-night,” unscrupulous
operators in the real estate sector and recognize the well established and good
developers in the field. The proposed “Engineers’ Bill” insists upon the exclusive use
of qualified and certified professionals in the planning, designing and construction of
new buildings; and thus, improve the level of accountability, quality control and
safety.
3 . 4 . 2 . N A T I O N A L R E A L E S T A T E D E V E L O P M E N T C O U N C I L
( N A R E D C O )
In conjunction with CREDAI, the National Real Estate Development Council
(NAREDCO) was established to build investor and consumer trust in the real estate
sector. By implementing self regulation designed to monitor the quality of real estate
development and enforce greater transparency in all real estate transactions,
NAREDCO hopes to spur even more growth in this sector. All NAREDCO members
are responsible for adhering to a strict code of ethics. Further, new state level
“REDCOs” will help increase NAREDCO’s coverage and operational efficiency.
4. COMMERCIALIZATION OF INVESTMENT
The liberalization of foreign direct investment norms and related initiatives may well set off a
second boom in India’s real estate industry.14
Until recently, only a handful of banks,
financial institutions (i.e. insurance companies), and high net worth individuals (HNWI)
provided direct funding for the opportunistic development of real estate in India; however,
this paradigm is quickly changing.10
Attracted by India’s booming economy and its
consequences in the real estate sector predicated, a few large financial and private equity
firms are now launching funds targeted at the opportunities in the sector. These initiatives
suggest that the commercialization of real estate investing is already underway in India,
which should help redirect capital flows on a large scale into the country.
4.1. HOUSING DEVELOPMENT AND FINANCE
CORPORATION (HDFC)
HDFC, India’s premier housing finance company, has launched a real
estate fund in partnership with the State Bank of India (SBI). The
joint venture, named HDFC India Real Estate Fund
(HIREF) and approved by India’s Securities and
Exchange Board (SEBI) in March 2005, will invest in equity and equity-linked
instruments of companies engaged primarily in real estate in major cities in India.1
It is
important to understand this aspect clearly: HIREF is modeling itself after a U.S. REIT
that will invest in securities (i.e. secondary market) of already established companies

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rather than provide financing for direct investments in development
projects (i.e. primary market). The rationale behind this approach is to achieve a
balanced risk-reward profile through diversified exposure to the “overall business
models” of integrated real estate companies in India; many of the companies being
targeted by HIREF engage in different aspects of the real estate value chain, including
development, construction, property management, or brokerage.
As part of its approval from SEBI, HIREF will initially target only domestic
investors. It has a target corpus of Rs. 750 crores ($150 million USD) with a greenshoe
option of an additional Rs. 250 crores ($50 million USD).1, iv
It is to have a 7-year close-
ended term, which will be privately placed to banks, insurance companies, local
corporations and HNWI (same investor base that has been making direct investments in
real estate on a limited basis), and require a minimum commitment of Rs. 5 crores ($1
million USD) per investor.24
4.2. ICICI JO I N T VE N T U R E S
ICICI, one of India’s premier consumer finance companies, has announced its intent to
pour Rs. 1,000 crores ($225 million USD) into a real estate fund it plans to call the India
Advantage Fund-3.28
ICICI has an active presence in both India and Canada, as well as,
several other partnerships with global financial institutions in the U.S. and U.K; one such
partnership is with Prudential Life Insurance company. Most recently, ICICI trumped
Citibank as the most active underwriter of auto loans in India.25
In contrast to HDFC’s fund, ICICI plans to use the capital for direct
investments to jointly develop property or buy existing properties already
leased to major corporations. The India Advantage Fund-3 will target
both domestic and foreign investors through joint-ventures with other international
partners; at least three or four are currently in advanced talks with ICICI. In a recent
issue of the ‘The Real Estate Alert,’ it was reported in the grapevine that Tishman Speyer
Properties (TSP) was one such company.v
In our conversation with TSP, Mr. Ted
Schweitzer (COO, of Tishman Speyer Properties heading up the company’s Indian
operations) admitted that they had recently concluded their partnership agreement with
ICICI and that they were also looking into plugging $600 million of their own equity in
the future based on the success of India Advantage Fund-3.26
As part of its commitment to sourcing attractive deals, ICICI has already closed on
several: it has tied up with Mumbai-based Oberoi Developers and won the bidding for an
upscale Glaxo property on the island of Worli (Mumbai) for over Rs. 108 crores ($22.5
million USD). It has also teamed up with top construction developer Hiranandani to bid
for another property: Srinivasa Mills located in Lower Parel, Mumbai. In addition, ICICI
has bought over 200,000 sq. ft. of prime commercial space in Hyderabad.27
iv
10,000 billion Rs. is the same as Rs. 1000 crores
v
The Real Estate Alert is considered one of the industries premier trade journals but has a reputation of being “rag,” as it
often publishes speculative articles about companies and their intentions.

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4.3. OT H E R S
Several other firms are also considering interests in real estate funds.
Kotak Mahindra (KM) and Infrastructure Leasing and Financial
Services (ILFS) are two other local firms looking to launch separate vehicles of about
$100 million each (500 crores) to invest in the development of new IT/commercial parks,
shopping malls, and residential complexes.24
Separately, a UK-based financial services firm, Dawnay Day,
has stated that it will launch a $50-100 million fund (Rs. 250 –
500 crores) to invest in hotel properties and townships of over 100 acres.vi
4.4. NO N -IN V E S T M E N T FI R M S A L S O SU P P O R T I N G T H E
CO M M E R C I A L I Z AT I O N PA R A D I G M
The largest U.S. real estate companies, including CB Richard Ellis, Cushman &
Wakefield, Jones Lang LaSalle and Colliers have all had a presence on the Indian
subcontinent for several years to help U.S. corporations set up call centers and other
operations in what is now a white-hot trend. According to a 2003 report by Forrester
Research, the acceleration in outsourcing will result in 3.3 million American jobs moving
offshore by 2015, with 70 percent of those jobs moving to India. Capitalizing on the
merger between CB Richard Ellis and Insignia/ESG last year, one second-tier company,
CRESA Partners, recently started operations in India by hiring an Insignia team of around
a dozen that wasn’t absorbed when the two companies combined.4
4.5. EM E R G E N C E O F A FO R M A L RE A L ES TAT E FI N A N C E
MA R K E T
Global real estate investing is beginning to represent a substantial share of the allocations
set by several institutional funds, but it has been hampered in India because of the lack of
credible mechanisms through which such investments can be made. To that end, we feel
that there exists a scope for and the environment may be ripe enough to establish a highly
formalized real estate finance market (real estate investment trust “REIT” or real estate
mutual fund “REMF”) in India to further facilitate investment in the nation’s real estate
enterprise.28 Several institutions are urging the Indian government to lay the foundation
for real estate investment trusts “REIT” or real estate mutual funds “REMF” in order to
attract more capital into the sector. 11,vii
vi
Dawn Day’s announcement came in advance of the new FDI norms announced by India’s Ministry of Commerce, which
may lead it revise its strategy. The new norms allow foreigners to invest in more types of real estate projects with land area
zoning eased to a minimum of 25 acres instead of the earlier requirement of 100 acres.
vii
A REIT or REMF is an investment vehicle, often tax-free, which buys, develops, manages and sells real estate assets
(direct investments). Its investments may also include shares/bonds of companies involved in real estate or mortgage
backed securities (indirect investment). In order to maintain their tax-advantaged status, REITs in the developed world pay

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REITs are unknown in India because the real estate industry is still in its
nascent stages. There are only a few large local institutions considered worthy of being
capitalized by such a regulated source of capital, but as the Indian real estate market starts
to be exposed to global norms, the emergence of Indian REITs is a likely scenario. It is
hoped that India’s modernization of its foreign direct investment platform is the “tipping
point” for the SEBI to organize such market in conjunction with tax-favored legislation
initiated by all layers of government.
The formation of an Indian REIT market will lead to greater market liquidity for real
estate in India, particularly in the ownership of commercial real estate.14 One may argue
that the recent boom in real estate is addressing this challenge, but demand for capital still
far outstrips supply.29 For instance, an investment of $100 million (Rs. 475 crores),
which is small by global standards and easily affordable by a medium-sized realty
company in developed countries, is considered remarkable in India.viii Local developers
simply do not have the disposable capital to make such an investment, which is
prerequisite for developing the kind of world-class real estate necessary for broader
economic growth; and the challenges faced by these companies are further exacerbated
by their inability to secure large sums of external financing.
The introduction of real estate investment trusts or real estate mutual funds would help
address this issue, as they have been ideal for propelling capital in other developed
countries. They combine the best features of the real estate and finance industries, and
provide a whole host of benefits to both “users of capital” (i.e. developers) and “providers
of capital” (i.e. investors).ix
Accessibility – REITs or REMFs would provide new investment avenues for pension
funds, endowment funds, and insurance companies seeking diversification of their
portfolios, thereby bringing the institutional investor on a large scale into the ambit of
the Indian real estate market. We suspect that the involvement of such players can
help further boost professionalism in the real estate sector.
Increased Liquidity – Direct investment in real estate is a time-consuming and
laborious process, especially when it comes to buying or selling one’s stake. In
contrast, an investment in a REIT can be more readily converted into cash as its units
can be traded on the stock exchange. This benefit of liquidity has helped attract a lot
more capital for real estate investment in developed countries.
a considerable portion (e.g. 90%) of their operating profit (a.k.a. funds-from-operations, FFO) in the form of dividends to
investors. The terminology REIT and REMF are used interchangeably by the Indian government and, hence, throughout
this paper.
viii
Singapore's Lee Kim Tah Holdings, a well-known property developer, is implementing a township project on the outskirts of Chennai in
association with an Indian company and its equity investment is just $5 million — approximately Rs 25 crore. This is considered a large
investment by Chennai’s standards, as it has dwarfed other residential projects in the city.14
ix
A significant portion of the following ‘discussion of benefits’ is taken from an article published in The Times of India, on
December 25, 2004.29
These benefits are well known in the world of real estate finance, but have been sourced for the
reader’s reference nonetheless.

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Diversification and Affordability – Real estate has traditionally
been a sound investment option but remains limited to only a few as the amount of
money required for investing in real estate directly is very high. REITs would allow
common investors to reap the benefits of investing in real estate without risking
significant amounts, while helping the Indian market attract capital from untapped
distribution channels.
Proposed Tax Advantages – In the U.S., REITs pay no federal corporate income tax
and are legally required to distribute 90% of their income as dividends, thus
eliminating double taxation of income. If a similar tax structure is implemented in
India, it will prove a win-win situation for both investors and the real estate industry.
Professional Management – Real estate investment in India is fraught with risks
related to documentation, title of property, and several other legal aspects, which
would be mitigated in this scenario.
5. CRITICAL SUCCESS FACTORS GOING
FORWARD
In order to successfully develop and commercialize a vehicle for broader real estate
investment in India, there are several prerequisites that need to be established. The general
legal, economic and social environment needs to further adapt to a more efficient and orderly
market where investors will have confidence in their decision and their expectations of
returns.29
Rajiv Sethi, director of Omega Investments and Properties, has been actively
speaking with foreign investors who he says have shown a keen interest; however, “[they
are] wary of making any deals as they are unclear about the finer details.”18
Specifically,
there needs to be a continued commitment to increasing transparency, credibility, certainty
across all aspects of the Indian real estate enterprise. We feel that the following reforms in
addition to the proposals already underway still need to be addressed and are a prerequisite
for continued growth in foreign direct investment in the real estate sector.
5.1. IN V E S T M E N T RAT I N G CR I T E R I A
A rating system for making prudent investment decisions in real estate ventures is under
development by NAREDCO in association with ICRA and CRISIL, India’s leading credit
rating agencies. This will include a real estate ‘developer rating’ as well as a ‘project
rating’. Focusing on “operational risk,” developers are scored based on their track record
on individual projects assumed by them throughout the country. The success of this
system will most probably require a local government mandate and insistence by
prospective buyers to establish a social norm where all developers are forced to furnish
their NAREDCO / ICRA / CRISIL rankings before being selected to construct and
develop a new project.

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5.2. MO D E R N A N D EF F I C I E N T LE G A L SY S T E M
India must continue to simplify its legal system pertaining to real estate. By streamlining
this process, investors will be able to maintain greater confidence in their relevant deals
through reduced legal uncertainty. There are currently over 100 Indian laws pertaining to
real estate, some dating back to the 19th
century, many of which vary in terms of
relevancy at national and state levels. For example, CREDAI’s Urban Reform Initiative
recently helped abolish the ‘Urban Land Ceiling Act’ at the national level; however,
several states still continue to adhere to the old policies.2
All states need to abandon their
old mandates and eliminate any unnecessary legal complexities in order for the country’s
real estate market to grow evenly; the harmonization of national, state and local laws is
yet to completely happen in India.
Secondly, foreclosure laws need to be further modernized so that the relevant legal
platform is more “lender friendly” and provide for speedy recovery in the event of
default. In India, foreclosing in any capacity is an extremely costly and time-consuming
process that has been known to take up to ten years. Clearly, this is unacceptable for a
large-scale commercial approach to real estate investing. Some local governments have
made an effort to streamline this process by appointing a public official as a recovery
officer who can help settle claims out of court, but this process is known to be wrought
with corruption.
5.3. “TH E TE N T H PL A N ”
The archaic Registration Act of 1908, which currently governs the transfer of all titles,
including all applicable capitalized leases, is no longer adequate for the level of
transparency that will be sought by accredited institutional investors. This issue is being
tackled head on by ‘The Tenth Plan,’ where CREDAI has recommended developing a
computerized database of all land records available to the public. The initiative, when
approved and implemented, will also require all relevant documents to be filed within one
month of a transaction.30
5.4. PR E PA R I N G F O R GL O B A L CO M P E T I T I V E N E S S
As the Indian economy continues to liberalize, a multitude of players are expected to
enter the real estate and construction arena, not only from within the country but also
from abroad. Global competitiveness along with the ‘search for excellence’ in quality of
service will demand capacity building efforts in the real estate industry. Training will be
required for the various players in the real estate sector. This responsibility will fall on
the premier education and management institutions, training institutes in the sector,
research and development institutions, the developers’ associations in association with
professional bodies.

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6. MARKET ANALYSIS
The Indian cities of Mumbai, Bangalore and New Delhi have emerged as the top
three investors' choices for real estate investment in 2005, according to Jones Lang LaSalle's
annual Investor Sentiment Survey - Asia. The survey also noted that investment in the region
will continue to be robust this year with more confidence towards the retail and office
property markets across the region. In addition to Jones Lang LaSalle’s report, we have
identified the following opportunities for real estate investment, as follows:
6.1. OF F I C E MA R K E T
Initial demand for quality office space was fueled in 2002 by financial institutions
outsourcing their back office operations and call centers to India. While India has over
28 cities with populations of more than 1 million, real estate activity is focused on five to
six major centers. Mumbai is the financial capital, and commands the highest values for
purchasing and renting space. Delhi is the political capital. Bangalore is the top
technology destination, dubbed the “Silicon Valley of Asia.” Hyderabad is also a
technology center, with significant US corporate (e.g. GE, Microsoft, Oracle) presence
due to the lower fees for space. Chennai courts a mix of IT-enabled service providers,
back office operations, and business process outsourcing firms, with a massive undersea
cable effort in place that offers the best connectivity for multinationals. Pune, near
Mumbai is also a technology center, home to over 450 software companies, as well as
other multinationals, including Phillips and Mercedes Benz. Well managed buildings
continue to attract better tenants and higher values. Some suburbanization is occurring
due to the emergence of lower cost, high quality space outside of central business
districts. For Mumbai and Bangalore, vacancy rates have hovered at 10% to 15%, while
New Delhi is higher, at roughly 30%, due to excess supply in the suburbs.x
According to
a survey by real estate consulting firm CBRE, office space in Mumbai is more expensive
than Manhattan. The CBRE survey, titled Global Market Rents, has ranked Mumbai as
the world's 15th
most expensive place, Manhattan, the 20th, while Delhi stands at the
32nd position. It cites the cost of occupation in Mumbai at $56.83 per square feet per
year, while in Manhattan, it is $52.04 per sq. ft. and in Delhi it is $40.62 (Occupation cost
represents rent plus local taxes and service charges).
6.2. RE S I D E N T I A L MA R K E T
To fill the gap between housing supply and demand, PricewaterhouseCoopers estimates
that the urban housing sector in India will require investments of Rs. 1.2 lakh crore ($25
billion USD) over the next five-year period. The residential market is characterized by
sales of apartments and developed land plots by the state government agencies and
private developers; developers rarely lease out apartments. Instead, all leasing
transactions are done through the individual apartment owners. Low interest rates on
x
Appendix Section #1 has been attached for you reference, where charts show the cost per sq. ft. of commercial space in key
cities.

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housing loans and government incentives (i.e. exemption of interest
payments from income tax) have spurred a construction boom, primarily of premium
apartments. The housing finance institutions have supported this boom with generous
lending policies.
Leading developers in Mumbai, Delhi, Bangalore and Chennai are recording sales of
almost 80 apartments a month, across all segments of buyers. The vacancy rates for these
apartments are low since most of the buyers are end-users, and there is an active leasing
market for such properties in these cities. The development of new residential apartments
is being driven and guided by the growth of the services sector – primarily IT, banking,
finance, and retail – and the new investment has been clustered in the cities of Delhi,
Bangalore, Mumbai and Chennai. The market for newly built premium apartments
remains strong. In Mumbai, vacancy levels are reportedly below 5%, New Delhi at 2%,
and Bangalore roughly 8% (New York’s vacancy in the multifamily sector is around 9%,
for reference).
6.3. LO D G I N G A N D HO S P I TA L I T Y MA R K E T
The most recent data and commentary about India’s lodging market can be found in the
‘Indian Hotel Industry Survey’ cooperatively prepared by HVS International and The
Federation of Hotel and Restaurant Associations of India (FH&RA).
6.4. RE TA I L MA R K E T
According to an ICICI study, malls are estimated to become a Rs. 38,500 crore ($8.25
billion) sector by 2010. Knight Frank, a global real estate consulting firm, has ranked
India 5th
in its list of 30 emerging retail markets and predicted an impressive 20% growth
rate for the organized retail segment by 2010. Leading brands are increasing their
presence in India’s cities, fueling demand for retail space. The demand for retail space is
mainly from supermarket chains, departmental store chains, consumer electronics, IT-
enabled service companies, banks and financial institutions.
6.5. IN D U S T R I A L MA R K E T
The industrial market in India is controlled and guided by the state governments.
Transactions primarily consist of direct land procurement from the state and central
governments under land disposal schemes launched by the respective agencies. Most of
these government “industrial estates” are located in the outskirts of major cities or in the
rural areas that are categorized as ‘backward areas’ by the state government as part of the
policy to promote investments in these locations. For example, the government provides
a 10-year tax holiday and incentives on land to attract investment to these locations.

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7. APPENDIX
7.1. SE C T I O N (1): CO M M E R C I A L RE A L ES TAT E , MA R K E T
PR I C E S A N D RE N TA L RA N G E S 5
7.2. SE C T I O N (2): “GR A D E A” CO M M E R C I A L SPA C E I N
IN D I A 13

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EN D NO T E S
1
“HDFC Launches Real Estate Fund ‘HDFC Property Fund’ in Association with State Bank of India,” Housing Development Finance
Corporation Limited. Business Wire India. March 23, 2005
2
Suresh, V. “Real Estate Development – Engine for Economic Growth.” (Paper)
3
“India has Potential for 8% GDP Growth,” India Express. April 6, 2005
4
“Smaller Commercial Firms Go to India,” The Real Deal – New York City. January, 2004
5
Kumar, Ashok. “India Outsourcing Heaven for Multinational Corporations,” CRESA Partners. August 2004
6
“IT, BPO firms to demand 100 million sq. ft. space,” Economic Times. September 13, 2004
7
“India: The Emerging Face of an Ancient Culture,” The India Initiative – Conference @ Dag Hammarskjold Lounge – School of
International and Public Affairs @ Columbia University. April 22, 2005
8
Kanth, Shri Amod K. “EWS and Slum Dwellers in Metros: A Case for the Shelterless in Delhi,” 1998
9
“India’s Coming Realty Show,” India Brand Equity Foundation. (http://www.ibef.org)
10
“Indian Real Estate is Perfect ‘Alternate’ Investment Option,” ICICI Bank Research. October 25, 2004
11
“India Property Needs to Open Door to FDI,” The Financial Express. March 29, 2005
12
“Freedom Tower to rise 1,776 feet from ashes,” CNN.com. (http://www.cnn.com/2003/US/Northeast/12/19/wtc.plan/)
13
“Guide to Corporate Occupiers, Asia Pacific: Republic of India,” Jones Lang LaSalle. March 2004
14
Srinivasan, Raghuvir. “Boost for Construction Sector – FDI, the New Building Block,” The Hindu Business Line. February 27, 2005
15
Solomon, Jay and Eric Bellman. “India's Cabinet Lifts Restraint on Land Investing,” The Wall Street Journal – Dow Jones Publications.
February 25, 2005 (p. A17)
16
“Investment in India - Investing in India - Venturing into the Indian Market,” Ministry of Finance, Government of India.
(http://finmin.nic.in/foreign_investment/fii/)
17
“Is it Safe to Invest in Real Estate Stocks?” March 11, 2005
18
“Fast Forward.” India Business – The Times of India. The Times News Network, March 5, 2005
19
White, Brett. Conference call with Mr. White in March, 2005
20
Tuli, Neeraj and Shailaja Tuli. “SEZ you in India?” A whitepaper published cooperatively by Kennedy’s Law and Shailaja Lall Tuli &
Co.
21
Gandhi, Bhavesh. “Special Economic Zones In India – Opportunities Unlimited,” MahaMumbai Special Economic Zone, c/o Sea King
Infrastructure Unlimited, 2001
22
Mehra, Preeti, and Moumit Bakshi. “Experts see more FDI Flows in Realty Sector.” The Hindu Business Line, March 25, 2005.
23
“Special Economic Zones in India.” Ministry of Commerce & Industry. (http://sezindia.nic.in/)
24
Kumar, Anand. “Corporate Players in Surging Real Estate Market: Letter from Mumbai.” The DAWN Group. March 28, 2005
25
Palande, Rajendra. “Car loan: ICICI Bank pips Citi,” Rediff.com – Business Standard. April 12, 2005
26
Schweitzer, Ted. Conference call with Mr. Schweitzer in March, 2005
27
Das Gupta, Surajeet. “Venturing into a Bigger League: ICICI,” Rediff.com - Business. September 27, 2004
28
Kannan, Shanthi and S. Varadharajan. “Real estate funds becoming a reality.” The Hindu Business Line. March 26, 2005
29
“Mutually Profitable.” India Business – The Times of India. December 25, 2004
30
Narasimhan, C. R. L. “Tenth Plan and a touch of realism,” The Hindu Business Line, April 18, 2005

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