Manoj Benjamin, chief executive of Vancouver based Royal Indian Raj International Corporation (RRIC), is leapfrogging into the big league, with his plans to set up a $2.9 billion 3,000 to 5,000 acres smart city near Bangalore. It is the biggest foreign direct investment in India’s real estate sector.

The Bangalore project is the first of four Royal Garden Cities that RIRIC plans to build in India. The three others are expected to come up in Mumbai, Delhi and Kolkata. The Mumbai project would be launched in the beginning of 2006 over 5,000 acres of land across the harbor from the Gateway of India.

The real estate sector in India is poised to see a capital infusion of more than $7 billion in the next 12 months. Foreign players have committed around $5 billion, while domestic developers are likely to bring in $2 billion in phases.

Real estate developers—domestic and international—are upbeat about the growing demand. Some of the foreign developers are betting on residential and integrated township development. Nearly 50 per cent of the capital flow is towards these projects because of spiraling real estate prices and people investing more in property.

While some developers are betting on the residential segment, many of the foreign firms are pouring money into technology businesses and call-centers in Bombay, Delhi, Bangalore and Hyderabad. Many foreign investors prefer the ready-made infrastructure of industrial parks. They are partnering with Indian developers, such as Unitech and DLF Universal and RMZ Corp. to build ready-to-occupy facilities and built-to-specification units.

What’s tempting the foreign developers is the five million square feet of committed commercial space—mostly in the form of call centers, back-office operations and research-and-development facilities—that is expected to hit the markets in Mumbai, New Delhi, Bangalore and Chennai by the end of 2004.

Multinational Corporations such as Texas Instruments, Oracle, Accenture, SAP, Convergys, Honeywell, IBM, Intel, Microsoft, Dell are all building their own campuses and increasing the scale of their operations. IBM, HP, Dell and Microsoft alone have massive campuses spanning a staggering 1.1 million sq ft in Bangalore alone.

Some of the other big projects likely to take off soon include the 10,000-acre special economic zone (SEZ) in Navi Mumbai, being built by the Hiranandani Group in association with the Singapore-based Jurong Consultants. Contact centers have accounted for the vast majority of demand for office space in major Indian cities in recent years. Last year, office space taken up by Contact centers accounted for close to 60 percent of the total absorption of office space in major cities.

The story doesn’t end there. U.S companies will be leasing over 300 million square feet of space over the next 10 years in India. “A demand of such magnitude had never been seen anywhere but in the U.S and Europe,” says William Goade, Chairman, CRESA Partners, an international corporate real estate consultant firm.

Apart from technology firms expanding their base, retail industry in India is on an upswing. FDI regulations have prevented the entry of international firms so far, and most of the foreign real estate developers are sitting on the fence, waiting for regulations to ease, when they would like to bet on this sector too.

Why Now?
India was not on the business radar screen of most U.S companies two years ago, but now there has been a great awakening and this has translated into greater demand for real estate.

Post the Internet bubble, real estate prices have sharply dropped in the U.S., forcing real estate developers to take a hit. With the U.S. and European companies continuing to send work to India and expanding their India operations, producing one of the biggest construction booms ever in the country, foreign developers are staking their bets on the booming India markets.

Crossing Barriers
Despite the Indian Government’s stringent regulations on foreign investors owning real estate assets in India, foreign real estate developers have explored other ways around them to get to a piece of the action. They are taking up roles such as property managers, consultants or project designers for India developers.

“Restrictions on land ownership, along with planning laws and processes, make it hard for us to play the same role as we do in other countries,” says Joe Barr, a managing director of South East Asia, at Bovis Lend Lease. Instead, the company currently offers design and construction services to India developers. The rules governing foreign ownership serve high barriers to entry—the minimum area for a company to develop, for example, would have to be 100 acres, roughly 4.4 million square feet, a daunting amount of space for any developer to undertake even in the U.S., much less in India. Another requirement: a minimum lock-in period of three years from a developer’s original investment before repatriation of that investment is permitted.

Multinational companies setting up operation across India prefer to work with the same developer, but with most of them being very regional, there is a lack of developers that have a national presence. And more than half of the developers in India are small players, with only a few big national firms, while many aren’t experienced in building for big companies.

Property Management Services
Multi national companies often outline specifics on everything from how the facility should look to its physical infrastructure to its layout. Domestic players have failed to bring international expertise to the table. Sensing a gap in the market, foreign industrial and logistics specialists with enough money to set up whole networks of buildings are also starting to sniff around multinationals moving into India. Real estate services firms already have started capitalizing on that reception. Firms including CB Richard Ellis, Cushman & Wakefield Inc., and Jones Lang LaSalle Inc., which specialize in managing properties and leasing them, have been rapidly expanding their offices in India. They benefit from having a head start over Indian property management and relationships firms.

Land of Opportunity
The past few years has attracted private equity players and other real estate funds from abroad. One of the main reasons for investors looking at real estate is that the yields are higher and there is far less volatility in the real estate market when compared with the equity market. Returns from commercial property in India have been traditionally higher than in other Asian countries.

For commercial property, income yield is in the range of 9 to 12 per cent. The spread between long-term government bond rates and the yield of investment properties in IT parks in India today is at an all-time high of 500 to 650 basis points. In mature markets like Australia and the U.S., the spread is only 100 to 200 basis points. In Singapore, the publicly traded real estate investment trusts (REITs) are also within the range of 100 to 300 basis points. This represents a compelling case of superior returns for investors.

Some of the real estate funds are concerned about foreclosure norms, repatriation norms for original investment and profits, currency devaluation leading to skewed returns, infrastructure bottlenecks and lack of transparency. However, industry experts point out that Western investment funds and Asian property are seeking opportunities in this fast-growing segment.

Clearly, India is where the action is at the moment and it is a strong investment case for foreign participation. Real estate developers worldwide chorus: “We’re just waiting for [the market] to be opened up.” The necessary regulations, if passed, will add further excitement to the Indian real estate.