By Clayton D. Risher

When Indian Prime Minister Manmohan Singh recently relaxed foreign investment legislation, the change included new provisions for foreign companies to own Indian property. These deregulatory moves by India's Parliament have since wrested a variety of real estate holdings from the Central Government's control and put them in play for institutional and private investors to acquire.

There currently are no REIT rules in India, but the new legislation makes it easier for U.S. investors to acquire property in the country.

India's government has become a middleman of sorts, according to Sandeep Methrani, executive vice president of Asian retail at Vornado Realty Trust (NYSE: VNO). "In some cases, the government purchases farms or mills from other government arms. These properties are remediated, then placed on the open market to attract foreign direct investment (FDI)."

To manage the windfall, India's freehold policies have morphed once again in order to steer FDI to new construction. Currently, all FDI must be apportioned to projects of 500,000 square feet or more, according to Methrani.

Methrani's outlook is positive. "Vornado's plan is to invest millions of dollars in Indian office buildings in the next few years. We are also in the final stages of raising $600 million, which will fortify our first ever India Property Fund," he says.

Additionally, investors should note that India has enjoyed a strong economy for years, and there are more than 35 cities with more than 1 million inhabitants, Methrani says.

Rapid Growth

The nation is certainly poised for growth with India's GDP steadily increasing from 6 percent to 8 percent since 2005. According to Moody's Investors Service, trends of modernization are set to continue, and real estate development is forecasted to grow from $12 billion in 2005 to $90 billion by 2015.

Recent reforms pave the way for a more organized approach to urban planning and development, and large-scale projects are likely to become more common.

With development projects such as malls, apartment complexes and hotels springing up across the landscape, Jean-Claude Goldenstein, managing director of NAI Global Solutions, offers a view of balanced optimism for India. "It's still behind China as an Asia Pacific business destination. However, many of our clients are gaining comfort with India as an investment alternative to China for their growth needs," he says.

Complex Landscape

Acquiring real estate in Bangalore, Chennai, Delhi and Mumbai is not always easy. Among the list of challenges companies face are precipitously high commercial absorption rates, as high as 98 percent in some sectors according to market reports from CB Richard Ellis and NAI.

Guy Jaquier, president of Asian operations for AMB Property Corporation, (NYSE: AMB) spoke of the many challenges that AMB and its clients like FedEx and DHL face in India. "There is inherent complexity in each deal and boundless regulation in India," he says.

Will O'Donnell, vice president of transactions in Europe and Asia for AMB, says doing business in India is "certainly more complicated than doing business in the United States or China," noting India's universally high tax regime.

"Borrowing money for commercial loans inside India is very expensive. This makes it difficult for domestic investors to acquire property. There's currently a lot of money leaving the country," he says.

Additionally, O'Donnell says India's deficient transportation infrastructure presents a challenge. "If a logistics company wanted to deliver something from Washington State to California, this would not present a problem. However, to cover a similar route in India, the trucks will be stopped frequently in order to pay stamps, duties and local province taxes along the way."

In contrast to China's established infrastructure that was created over the last 20 years, India remains steadfastly less progressive. However, strategic highways, railways and ports are under construction or in the planning stages.

Investing in India

There are many caveats to consider when investing in the region. "The cost of outsourcing is rising in India, and some feel that the market is about to peak," says Mark Kobayashi-Hillary, offshoring director of the U.K. National Outsourcing Association. "However, Indian companies are now world leaders in software quality and are no longer chosen just for low cost. It is unlikely we will see a flight of investment from India's high-technology sector.

Business process outsourcing services like accounting, content development and data conversion continue to be high growth sectors as well. According to Merrill Lynch, outsourcing will create 200,000 new jobs a year and demand for more than 15 million square feet in the near future.

The economic benefits of outsourced services along with relatively low real estate costs translate to investment dollars continuing to percolate in India for quite some time according to Moody's.