Mumbai, April 2:

Enthused by the gradual removal of investment restrictions and spiralling demand for real estate on the back of a sizzling economy, a string of overseas private equity funds are making a beeline to India.

Long viewed as a risky business associated with huge equity premiums in the absence of any transparency, India’s real estate market is now attracting investments from private equity majors like Morgan Stanley and Warburg Pincus. Morgan Stanley Real Estate said last month it had invested $68 million in Mantri Developers Pvt Ltd, a private Bangalore-based real estate developer focusing on residential, office and retail projects.

New York-based private equity firm The Chatterjee Group is planning to raise $450 million to invest in commercial real estate in India. Britain’s Trinity Capital has also expressed interest to pump in funds into the sector. “The surge of investments is backed by corporate office demand that is growing by 13 to 14 percent year-on-year,” said Chanakya Chakravarti, joint managing director of real estate services firm Cushman and Wakefield India.

“There are few emerging markets that are offering the kind of yields that India is offering in a transparent environment. India offers a huge opportunity for investors who are looking at Greenfield projects,” Chakravarti said, “I am extremely bullish on the Indian real estate sector. There is clearly an opportunity for the market to move forward in the years ahead.” Although the concept of private equity investments in India has been in existence for a long time now, real estate by and large has been considered an alternate asset class and a risky business associated with huge equity premiums.

The fact that foreign investment was prohibited in most real estate categories by the federal government not long ago also acted as a deterrent in the flow of overseas funds into the sector. The sector’s potential, however, has been unleashed in the last couple of years with one of the world’s fastest growing economies allowing 100 per cent foreign direct investment in the construction sector under the automatic route. The minimum area threshold for foreign direct investment in integrated township projects has now been reduced to 25 acres from 100 acres.

The ease in overseas investment norms coupled with a booming economy, which expanded by a robust 8.1 per cent in the fiscal year ended on March 31, has triggered a huge demand for commercial and residential projects. The build up of capital in 2005 was the highest in residential property as housing affordability received a boost from rising middle class incomes and lower financing costs, says a study by Cushman and Wakefield India.

According to the study, there is a shortage of 12 million housing units in urban areas alone and scope exists for 400 township projects over the next five years spread across 30-35 cities, each having a population of half a million. Cumulative office space demand over the next three years will be in excess of 66 million square feet and IT and technology outsourcing services segments is estimated to account for over 70 per cent of net absorption.

Capital flows into corporate real estate are estimated at over $5 billion over the next three years. “The Indian real estate market is finally finding its rightful place under the sun,” said Balaji Rao, managing director of TCG Urban Infrastructure, The Chatterjee Group’s real estate investment arm, “If we believe in the knowledge industry’s growth, even by a conservative estimate the office space requirement in India is going to touch 40 million square feet in the next three years up from 22 million square feet now.” Rao said The Chatterjee Group was in talks with US-based Vornado Realty Trust to partner for the $450-million India Property Fund that will be utilised for constructions in special economic zones and integrated townships.

“We believe India presents an extremely compelling investment story and expect to be a long term investor in the real estate sector,” said Sonny Kalsi, managing director and global head of Morgan Stanley Real Estate Investing.