Great Times Ahead for Indian Real Estate

By: George Gonigal

Introduction of Real Estate Investment Trusts (REITs) and Real Estate Mutual Funds (REMFs) in India would change the way Indian real estate developers finance their projects.

As per estimates, the Indian real estate sector, which is currently pegged at $70 billion at present, will reach $120 billion in the next 5-years. Once the REITs and REMFs will pump in their investments in the markets, the financial structure of the industry is likely to be much more robust. If industry reports are to be believed, REITs alone can bring $50 billion in the markets.

Advantage over Private Equity (PE) funds

As far as investment from asset management companies in Indian real estate and infrastructure sector is concerned, private equity funds have invested Rs 25,000 crore in these sectors in 2007 alone, says a report from Grant Thornton, a management consultancy firm. The limitation, however, is that the one needs to invest at least Rs five crore in order to participate in PE fund. In this case, the volume of investment goes down. Now that the REITs and REMFs will be there in the market, one can easily have its pie in real estate with investment amounts as small as Rs 500.

The rationale

Once the real estate developers get access to funds in an organized manner, their cost of financing projects will come down and this benefit they can pass on to their customer. This way, a common man can expect some moderation in real estate prices in the coming times. Although, in the initial phase, it may happen that the real estate developers in order to generate more returns for the investment trusts and to lure them into investing more in their projects, may escalate real estate prices much above the intrinsic costs.

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