In India, construction is the second largest economic activity after agriculture. The investment in construction accounts for nearly 11% of India’s Gross Domestic Product (GDP) and nearly 50% of its Gross Fixed Capital Formation (GFCF). It accounts for nearly two-thirds of the total investment in infrastructure. The investment in this segment over the financial years 2005 to 2010 is estimated at US$ 124.65 billion.

A construction boom fuelled by a surge in office space demand led by the IT sector, and increasing demand for mortgage-financed housing stock for India’s middle class, makes India among the hottest real estate markets in the world, going by appreciation rates in the residential and commercial segments in major cities like Mumbai, Delhi and Bangalore. An undersupplied market gives an 11% net yield on office property in India, among the highest in Asia. A 20% to 40% price appreciation in the past 15 months, and office space in Mumbai, New Delhi and Bangalore starts to look like a very attractive asset class.

However India’s real estate sector has not been without its ups and downs. A major boom was witnessed in 1993-96, catalyzed by a relaxation in investment rules for non-resident Indians, which saw a spurt in the residential property markets in Mumbai and Delhi. The party didn’t last for long, and eventually led to a sharp slump at the end of 1996. Similarly the sector went through another cyclical upheaval in 2004 & 2005. However, the real estate markets in the last few months across India seem to have stabalised and the present trend, backed by strong fundamentals, reflects a mature market. Real estate values have also shown a sharp increase all over the country. This has been made possible by increasing job creation, higher disposable incomes, land supply & tax concession to developers, growing construction capacities, higher management expertise, longer, flexible mortgage products and increasing government spending on suburban infrastructure, including roads & transportation, airports, social infrastructure i.e. hospitals, educational facilities and amenities, commercial, retail, industrial and residential zones, hotels and Special Economic Zones.

As a result, unlike the earlier boom, there is actually a huge and growing demand for high quality commercial and residential spaces, in the metros and even in Tier II cities. This demand is fuelled by the voracious growth in IT and ITES sectors, and the imminent entry of foreign brands in retail. This is in sharp contrast to the high vacancies in residential properties (40-50% in Delhi ’s satellite towns, Gurgaon and Noida) despite a price boom in the mid 1990s.

Under-reported Values and Stamp Duty
In the past, a large real estate black economy existed in some cities, on account of the high stamp duties, ranging from 8 to 14%. In Delhi, where circle rates have not been revised periodically, it is still usual for property transactions to be under-valued by up to 60%, to avoid the 8% stamp duty. For overseas buyers, this reduced the value of the assets on paper and imposed a potentially higher capital gains tax subsequently, if sold and registered at actual transacted values. A reduction in stamp duties, and imposition of a minimum transaction value (based on market-based circle rates) for stamp duty registrations, are making transactions more transparent in present times. In almost all cities, except Delhi, real estate transactions are now carried out entirely ‘in white’.

Foreign Investment Deregulation
Foreign investment is now permitted in construction and project development related to both residential and commercial development in housing townships; commercial office space; hotels and resorts; hospitals; educational institutions; recreational facilities; and city and state level infrastructure. As a result, the share of real estate in FDI has increased from 4.5% in 2003 to 18% in 2005.

Purchase of immoveable property by foreigners:
India does not allow non-resident foreign nationals (other than persons of Indian origin who have acquired foreign passports) to buy land or immoveable property in India. However, the Reserve Bank of India allows foreign nationals living in India to acquire immoveable property for own use in India. Sale and repatriation of the benefits attract special conditions.

Subsidiaries of foreign companies, being Indian entities under the Companies Act, can acquire land and buildings for their usual business purposes approved in India.

Partnerships with Government agencies
The most interesting trend in foreign investments in real estate sector, is that of partnerships with local government bodies, which is a major confidence booster for investors as well as end buyers. A partnership with government bodies ensures availability of large parcels of land at a uniform price, and without encumbrances and litigation. It also ensures that projects are built in conformance to municipal requirements, which is often not the case in the private sector.

Foreign direct investors are pushing forth with major investments, especially in southern IT-hubs Hyderabad, Bangalore, Chennai. However, major projects are also coming up in Kolkata, Gurgaon - near Delhi, and even in Chandigarh, Punjab. For now, entrepreneurs from ASEAN are the biggest foreign investors in the sector. Keppel, Singapore Housing Board and Secom Engineers from Singapore, Salim Group from Indonesia, Kontur Bintang and IJM Berhad from Malaysia, have all embarked on real estate projects in various cities, offering office spaces for the IT sector and residential projects. Other origins are following suit too. Emaar Properties, Dubai’s biggest property developer (of Palm and World Islands fame) has earmarked $2 billion investments in India, in a joint venture with a local partner. British developer, Ladbroke, has announced a joint venture with Delhi’s biggest realty developer DLF Group. French group Acccor and the American Starwood properties are reportedly entering the serviced apartments segment in India.

However, the value appreciation trend of 2004 and 2005 (75% in less than a year in suburbs of Delhi) may not be sustainable. This sharp up trend had been due to the massive dose of secondary market investment to build portfolios. A steep rise in rates would make entry-level properties unaffordable for the young middle class, which is the biggest consumer segment. A correction is expected by 2007 as supply is expanding all over India. For instance, Gurgaon, Delhi’s neighbouring suburb, has less than 50% occupancy, despite being a hot destination. Meanwhile, new real estate is being developed and lapped up further down the Delhi-Jaipur national highway at lower entry prices than available on Gurgaon’s secondary markets. Therefore, while volumes will grow and the real estate base will enlarge significantly, speculative investment could stabilize, especially in the premium end, where purchases are not being made by actual users.