India

Real estate in India

At a time when the UK and the US property markets are suffering a downturn, the Indian real estate sector appears to be galloping ahead with some impressive statistics.

MOVING IN: Global brands such as Walmart, Carrefour and Tesco are arriving in Indian shopping malls.

The real estate sector is now India’s second largest employer (agriculture being the first) and contributes 5% to India’s GDP. To put this in context, the size of the Indian real estate sector is currently £24 billion and estimated to grow to a staggering £70 billion by 2012. A major factor in the success to date, and the prediction, is the high level of new foreign investment as a result of the relaxation of the Foreign Direct Investment rules and the emergence of the previously non-existent mortgage industry in India. Indeed through our extensive connections in India we have been able to effect introductions for a number of our clients who are already testing the waters either through direct investment or funds.

The impact has largely been on residential development where it is anticipated approximately 67% of foreign investment will be made. The fast moving pace in the Indian real estate market has meant that investment in Tier I cities such as Delhi and Mumbai has slowed down, steering investors towards Tier II cities such as Pune and Banglore and Tier III cities such as Mysore and Kochi where there are lower base costs meaning higher returns for investors. The government backing for projects that benefit urbanisation, which is necessary for Tier II and Tier III cities, is always an added bonus for investors.

Although to date residential development appears to be the preferred option, the commercial sector is likely to be more lucrative going forward. There has been a huge rise in demand for retail space due to the arrival of global retail giants such as Walmart, Carrefour and Tesco as well as high end luxury designer brands who are already making India’s shopping malls a more exciting prospect.

Is the success of the Indian real estate sector too good to be true and will it continue?

The predictions above suggest that the boom is set to continue. However, for investors, whether local or foreign, it is of course a matter of controlled risk. Whilst India is an exciting prospect for foreign investors, it is still fairly new and there are pitfalls in investing in real estate in India that investors should be aware of. Some of these are highlighted below.

• A high percentage of land holdings in India do not have clear title or ownership, hence land is usually sold off market. Land is typically held by individuals/families and this restricts organised dealings and sometimes hinders transfer of title
• Direct foreign ownership of real estate is not permitted. Investment is only possible in shares and convertible instruments of the company owning or developing the real estate
• Stamp duty on transfers of property is as high as 12% (or more in some states) and the stamp duty rates are applicable for all transactions
• Buyers have to comply with and operate within strict legal and regulatory parameters
• Repatriation of income is based on availability of accounting profits and not positive cash flow.

Kirpal Kaur
kirpal.kaur@mishcon.com

Kamal Rahman
kamal.rahman@mishcon.com

Property Matters! 07