December 04, 2006	Monday	Ziqa'ad 12, 1427

INDIA’S real estate sector has never had it so good. Demand for all kinds of properties — residential, commercial, retail and entertainment — is soaring. So too are the prices. The industry which had traditionally been starved of funds is flush with cash and raising billions of dollars, both domestically and internationally.

The Initial Public Offerings (IPOs) by the real estate companies are being oversubscribed several times as investors — both retail and institutional — are convinced that this booming sector will reward them in the long run. Investor response in capital markets abroad — in London and Singapore, for instance — is also excellent as many companies have realised.

The Foreign Direct Investment (FDI) in the real estate sector is also expanding, and international private equity funds, real estate developers and other investors are rushing in with loads of money.

Adding to the fun is the government’s plan for new special economic zones (SEZs) — nearly 250 have been approved with many more being proposed. The infotech and biotech parks and a host of other such facilities are coming up. And both, the federal and state governments are also investing billions of rupees in building new infrastructure or upgrading the existing ones, including highways and expressways, flyovers, airports, ports, railway corridors, etc., all of which will ensure sustained growth of the construction in property sectors.

Not surprisingly, both investors and real estate consumers are riding on the back of this new boom in the realty sector. Last week, when the scrips of Parsvnath Developers, a Delhi-based realty firm, listed on the Bombay Stock Exchange, took off with a hefty 80 per cent premium over the offer price.

The Parsvnath Developers’ IPO itself received an overwhelming response; the company’s Rs10 billion public offer for 33 million shares was over-subscribed by a whopping 60 times, generating demand for Rs600 billion worth of shares. On listing last week, the scrip — with an offer price of Rs300 — was off the trading block with a bang, hitting a high of Rs579.

Parsvnath is utilising the proceeds of the IPO to fund its frenzied activities, including construction of 20 integrated townships, over 50 residential and commercial projects, shopping malls and office space, besides nearly 10 SEZs.

Bangalore-based Sobha Developers, which also came out with an IPO last week, saw its issue being oversubscribed by an amazing 104 times. Qualified institutional buyers (QIB) over-subscribed their component of the issue by over 164 times, while high networth individuals (HNIs) overshot their allocation by 126 times.

The company which received bids for 925 million shares (as against an offer of just 8.8 million shares) priced the scrips at Rs640, the top-end of the price band. Sobha Developers will be using the fund to acquire land and also fund the ongoing projects.

UNTIL the current spate of IPOs and international offerings, the Indian realty firms had a negligible presence on stock markets. The real estate sector had been dominated by the unorganised players, many of whom accessed funds from speculators and investors in the non-formal sector. Banks have been loath to fund the industry which was considered highly speculative.

But the few companies that were listed on the stock exchanges have given outstanding returns to investors. The Unitech, another leading Delhi-based developer has seen its market capitalisation balloon by an outstanding nearly 70,000 per cent over the last four years. The Ansal Properties has seen a 30,000 per cent growth in its stock valuation, with its share price zooming from a low of a little over Rs3 to nearly the Rs1,000-mark.

Companies like the Unitech now want to leverage their strengths and tap international markets for additional funding. The Unitech last week decided to raise $700 million by listing a new firm, the Unitech Corporate Parks, on the London Stock Exchange’s (LSE’s) Alternative Invesment Market (AIM).

The Unitech is setting up a string of the SEZs in West Bengal and in the National Capital Region (NCR) around Delhi, and the funds raised in London will help finance these developments. One of its most ambitious projects is through a tie-up with the Indonesia’s Salim group, for developing two SEZs — a multi-product one and a chemical zone — covering nearly 25,000 acres in West Bengal.

Another top developer, Mumbai’s Hiranandani group also plans to raise about $750 million on the LSE’s AIM this month. This will be the biggest offer by an Indian developer in the international markets. The Hiranandanis, who developed Mumbai’s northern suburb of Powai, are involved in promoting the world’s largest residential building, the 90-storied 23 Marina, in Dubai, together with a local partner, the ETA-Ascon group .

The group will utilise funds to develop projects in Mumbai, Chennai and Jaipur, and to build SEZs. Another leading Mumbai developer, K. Raheja Corp, recently raised nearly $350 million on the AIM.

The group’s Ishaan Real Estate was the first Indian property developer to tap the AIM. The proceeds of the issue are being used to develop IT parks, the SEZs and residential projects. Following the listing, Ishaan’s scrip jumped by 20 per cent on the AIM.

Another developer, the West Pioneer Properties, also plans to raise about $50 million on the LSE’s AIM. The firm plans to develop shopping malls on the outskirts of Mumbai.

The AIM allows smaller companies to raise capital, and has far simpler regulations and norms. Last year, about 520 companies from over 25 countries raised $17.5 billion on the AIM. Indian developers find it convenient to raise capital through this route, quickly and cheaply without having to go through too many complex procedures.

Raising funds through an IPO in India is also an expensive and long-drawn procedure. Similarly, thanks to the Sarbanes-Oxley Act in the US, it is now difficult to raise funds easily in America. Developers opting for the AIM also avoid having to deal with private equity funds who can be quite demanding.

About half a dozen Indian developers are also planning to go for listings in the Singapore exchange. They include some of the large developers of Bangalore, who are promoting IT parks. Bangalore itself has attracted several international developers from Singapore, who are managing IT parks.

INDIA’S real estate sector is expected to balloon from the existing $12 billion to $50 billion by 2010, according to the Merrill Lynch. Funding such massive developments requires multiple sources.

The Indian government liberalised the FDI relating to real estate, allowing 100 per cent investments in the case of large projects. According to the Associated Chambers of Commerce and Industry of India (ASSOCHAM), the FDI inflows will add up to about $28 billion in about four years.

Analysts tracking the industry estimate that $10 billion of the FDI has already entered the sector — or is in the pipeline. An Assocham study notes that of total FDI of $8 billion this year, real estate will account for more than a quarter of international inflows.

About 150 foreign private equity funds have already invested in various Indian real estate development companies. Major developers from Dubai, Singapore, Malaysia, Indonesia, the US and Canada have also invested substantial amounts.

Dubai’s Emaar group, for instance, has already brought in about $850 million, and has ambitious plans across the industry. Global financial and realty majors, including Goldman Sachs, Morgan Stanley, Blackstone, Warburg Pincus, JP Morgan Stanley, AIG, Tishman Speyer and Siachen Capital are also investing significant sums in the real estate sector in India.

Last month, Starwood Capital group of the US announced plans to invest $500 million over the next three years. Barry Sternlich, chairman, points out that the company will invest in projects in tier-II cities, those having a population of over two million.

A growing list of developers is also planning to raise nearly $5 billion from the domestic market through IPOs. They include the DLF, one of the largest developers in the country which hopes to raise a massive $2 billion through an IPO.

India’s growing appetite for properties is driving this sector. The Asian Development Bank estimates the country needs 10 million new homes every year till 2030. There’s a huge backlog of homes, especially in the cities. Prices are unlikely to come down, till much of this backlog is cleared.

The inflow of billions of dollars into the sector would hopefully help reduce the demand-supply gap, making homes affordable.