FDI Projected to Surge in Indian Real Estate
Despite a temporary downturn in the real estate market due to high real interest rates (12-16%), the Associated Chambers of Commerce and Industry (Assocham) predicts a significant $21 billion increase in foreign direct investment (FDI) within the next decade. The chamber anticipates India's real estate sector will attract substantial FDI due to the expectation of high returns, anticipating considerable growth in this market. Specifically, they believe that foreign investors are actively seeking investment opportunities in India to capitalize on this anticipated growth.
High GDP Growth and Increased Investment Opportunities
Assocham's president, Mr. Sajjan Jindal, highlighted their assessment of FDI's role in the Indian real estate market. The organization projects that the current elevated interest rates will decrease as India achieves sustained double-digit GDP growth (over 10%) for at least a decade. They anticipate this economic upswing will create substantial opportunities for overseas investors in the Indian real estate sector.
Current Market Size and Future Projections
Currently, the Indian real estate market is estimated to be around $15 billion, with FDI contributing less than $4 billion. Bank credit to the sector exceeded Rs 3,50,000 crore by the end of 2007-08, and Assocham anticipates substantial growth in the coming years based on projected sector expansion. According to Mr. Jindal, one factor contributing to the predicted boom is the current restriction that mandates foreign developers can only undertake construction projects of more than 50,000 sq ft, which has limited FDI. Assocham expects governmental action to be taken to increase this limitation to at least 200,000 sq ft over the next decade, thus encouraging greater foreign investment.
"Since real estate in India is expected to be a major market, the chamber said the FDIs were constantly looking at India for parking their surpluses as returns on such investments would be the highest in the near future."
"… in future higher interest rates would subside with India scaling a GDP growth of more than 10 % for at least a decade and create huge space for overseas investors in its real estate sector."
"Another reason why the real estate sector would witness a boom … was that currently the foreign developers can undertake construction activities in a at least space of 50,000 sq ft, as a result of which the FDI component in domestic real estate market was restricted to less than four billion dollar."
Private Equity's Role
Furthermore, Assocham predicts a notable shift in the way foreign investors participate in real estate development: they foresee the capital inflow primarily facilitated by private equity rather than institutional mechanisms. The current availability of around 30 million sq ft of organized retail space, with an additional 100 million sq ft anticipated by the end of 2008 from over 300 mall projects, underscores the ongoing retail boom and the increasing demand for large retail spaces across India, influencing this investment projection.