Betting on growth


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IN Delhi’s suburb Gurgaon, post-modern, glass-encased corporate headquarters and towering housing complexes rise out of the fields of tin-roofed shacks where migrant construction workers camp. Giant hoardings present a future radically at odds with the dusty scaffolding, brick, and human toil of the construction sites. The crisp virtual landscape of prosperous families, luxury homes, and tropical greenery that the hoardings display also contrasts with the groups of mistris awaiting work on the roadside, the windblown shacks, and the garbage-strewn lots of this city under construction.

Who will inhabit the products of this building frenzy? The cost of a new apartment in Gurgaon today is 100 times more than what the average Delhiite makes in a year.1 Some of the apartments in completed towers have been purchased by wealthy Indians, but a good number lie empty, bought by speculators, Non-Resident Indians (NRIs) living in Dubai or London, or by the developer himself.

Gurgaon is the tip of an iceberg, one of the first visible results of the great land sale underway in India today. All over India, land aggregators representing major companies are out in villages, convincing farmers to part with their land, and landowners and politicians are cashing in on skyrocketing land prices. Even old Indian industrial firms have entered the game, selling off mill sites for malls and luxury housing. Indian developers, domestic fund managers, and numerous small investors are speculating on individual properties and real estate stocks. Foreign institutions such as pension funds and banks, NRIs, so-called ‘high net worth’ individuals, and the people who manage their money are all betting on India’s future by investing in Indian real estate.

As land in India is integrated into international markets, it is being transformed into a new financial instrument: real estate. Like other financial games, real estate speculation is a form of betting based on the assumption that prices will continue to increase. Actual demand for housing does not enter the picture, as one needs little justification for short-term investing in such a hot market. However, longer term investors – large Indian developers, private equity firms,2 international developers, and others – require more complex justifications. Developers and private equity firms tell stories about India’s growth to garner investment from abroad and guide their own investment strategies. Like the construction-side hoardings in Gurgaon, these stories describe an alternative India quite divorced from the reality on the ground; they result in buildings which cater to an imagined future and a present elite.


Why are foreign investors so interested in Indian real estate? Money has been pooling up in western markets, so much so that traditional investments aren’t providing the high returns that money managers would like to see. As a result, they have started investing in emerging markets. In an interview, Varun Sood of Capvent AG, a private equity firm based in Switzerland, explained why he started investing in India:

We started looking at India because the return expectations in Europe and the US were slowing down due to the huge capital overhang.... [T]hree to four years ago, there was so much capital that investors were beginning to expect very low returns. We had to look outside because we had a target of 25-30% IRR (internal rate of return) and we could only get that by looking at some of the more under-served markets. So, we set up operations in India and China.3

It’s not only the promise of high returns but the perception that capital has few other expansion opportunities that motivates investors. An American investor at a roundtable discussion at a recent real estate conference has long-term ambitions for India because there are few other large markets in which he can invest: ‘We’re running out of markets. Where would we go next?… In three years time, if we move out [of India] where would we go? We’re in China, in Brazil, Russia, North America, Europe. So we’re trying to invest in a platform in India that will produce profits year after year.’ An absence of alternatives has made foreign capital managers serious about investing in India.


The promise of so much money places immense pressure on the government, which has worked hard both to make land accessible to foreign investors and to make land transactions more straightforward. First, the Government of India has responded by legally enabling foreign direct investment (FDI) for the development of townships in 2002. When the expected FDI did not come, it further liberalized the policy in 2005, reducing the minimum size requirements for townships and legally enabling FDI in other types of construction-development projects. Now FDI in real estate can proceed through the automatic route, i.e. without prior approval from the government or the Reserve Bank of India (RBI).4 Second, on the financial side, the Securities and Exchange Board of India (SEBI) began allowing venture capital funds to invest in real estate in 2004, a move which spurred the development of domestic real estate focused funds.5


Third, the 2005 SEZ policy has helped to make large tracts of land available for real estate projects by providing considerable incentives to both developers and industry. The policy waives import duties, service tax, and central sales taxes for SEZ developers and gives them free reign to construct infrastructure and townships. Individual states have added their own incentives in terms of rebates on land, decreased stamp duty, and various incentives for investors.

Fourth, through the Jawaharlal Nehru National Urban Renewal Mission, the Government of India, with the help of the World Bank, the Asian Development Bank, the builders’ lobby, and others, is taking steps towards developing ‘an efficient real estate market with minimum barriers on transfer of property.’6 This government initiative links central government funding for urban-level projects in 63 cities to mandatory reforms which either reduce developers’ transaction costs, reduce uncertainties in the development process, or make more land available for development.7

Developers and investors from Singapore, Malaysia, Indonesia, and Dubai have been among the first foreign firms to take advantage of the newly liberalized real estate sector. Other foreign developers and construction firms from Europe and North American have followed, as have private equity firms such as Blackstone, IStar Financial, Walton Street Capital, and Trikona Capital. Large banks and investment services companies such as Citigroup, J.P. Morgan Chase, and Morgan Stanley are also investing. Firms either raise money and dedicate it to an India-specific fund, or they invest through existing multi-sector or regional funds. Estimates for the amount of money earmarked for investment in Indian real estate vary, but they easily run into the billions of dollars.8


The money is pouring in. The problem is, there is little to invest it in. A senior vice president at an American private equity firm explained:

There are no portfolios to buy, there are no fixed assets to buy. There are no rental buildings yet. You can count buildings on your fingertips. If you have moved in Delhi and Bombay, tell me, how many buildings can you buy today that has a single owner? Maybe DLF has five buildings. That’s it. Unitech has two buildings. Who else? Nobody else. Hiranandani might have one building. So where is that opportunity for anybody to buy these kinds of assets? Where are the portfolios? These portfolios will get built in the next ten years. But till that time, a private equity player has to be a developer.9


By ‘portfolio’, he means a collection of investments. In the world of finance, a building is an abstract entity, an asset that can be bought and sold along with other assets as a portfolio. One can diversify a portfolio by investing in a wide range of assets, and one’s portfolio can gain or lose value as a whole, based on the valuations of its components. In India, there are no readily available real estate portfolios the way there would be in the US or Europe, where these firms are used to investing in groups of real estate assets at a time. There aren’t even individual buildings to invest in. Most existing buildings have been sold in ‘strata’ to numerous buyers, making them impossible to purchase as one asset. In addition, FDI regulations in real estate allow investment in construction projects, not finished buildings.10 Given this situation, international investors are partnering with local developers to construct the real estate assets they are investing in.11

For their part, Indian developers are interested in joint ventures with private equity funds because foreign capital provides them an opportunity to expand their activities dramatically just when they think the market is right and there is a lot of money to be made. Also, the Reserve Bank of India, fearing a real estate bubble, has made it harder for them to obtain capital in India.12 As they work with foreign investors, Indian developers are increasingly thinking like them: neither are interested in constructing one asset at a time – a mall here or a luxury high-rise housing complex there – but in creating a portfolio of assets which can be sold for a profit to other investors in the future.


This fact helps to explain the sheer scale of the land transformation currently underway in India. These investors are not interested in individual houses or shops. They are constructing gated high-rise clusters of three hundred apartments, two hundred acre townships, two-million square foot mixed-use developments, and five-thousand acre SEZs because they want to invest millions of dollars at a time (thus reducing transaction costs) and build up portfolios of real estate assets quickly.

The fact that investors must construct the assets they invest in exacerbates another problem in real estate: the need to predict what a market will be like in the future. Investors cannot observe occupancy rates in an existing building before buying it, as they might if they bought a building in another market. They must make predictions about what Indian markets will be like in three to four years, as the process of purchasing land, getting approvals, designing buildings, and constructing them is lengthy. As in other highly speculative enterprises, ‘profit must be imagined before it can be extracted; the possibility of economic performance must be conjured like a spirit to draw an audience of potential investors.’13 How do Indian developers and fund managers conjure the possibility of profit? How do they attract investment to fuel the construction of Indian real estate? They do so by telling stories about growth.


Investor presentations, industry reports, and company prospectuses – all documents used to interest potential investors – employ a rhetoric of growth to demonstrate how the demand produced by the leading edge of economic liberalization indicates plenty of future demand for real estate products like malls and office parks. For example, Parsvanath Developers’ corporate presentation presents a rosy picture of contemporary India characterized by ‘consistent and sustainable GDP growth, [an] expanding service sector, rising purchasing power, faster urbanization, increasing impact of IT/ITes and organized retail sector, [and] improving regulatory framework.’14

Everything on the powerpoint slide is rising, expanding, growing, or improving. This is consistent with most reports’ presentation of the ‘demand drivers’ behind the growth of the real estate industry today: all are presented as trends with growth curves on an inspiring upturn. These stories about growth create expectations about growth. Expectations spur investment, which in turn fuels more growth. It is an inflationary spiral.


Developers’ presentations use evidence of existing growth to make a case for the necessity of real estate investment. The importance of an ‘expanding service sector’ and IT/ITes in industry reports’ ‘demand driver’ lists makes sense in light of the fact that the IT industry currently accounts for ‘around 75% of the total demand’ for Indian commercial real estate.15 So naturally industry reports and Indian developers’ prospectuses are peppered with charts like ‘IT Industry: Increasing Real Estate Requirements’ which match the growth of the IT/ITes sector and estimates of its continued demand for office space.16

Similarly, housing construction has closely followed the growth of incomes associated with employment in the IT sector, so real estate developers’ prospectuses harp on the ‘emergence of a strong middle class with lifestyle aspirations’ and its projected growth.17 The ‘new middle class’ is an essential selling point for retail space as well as housing. One prospectus claims that ‘the growth of the Indian middle class has… also resulted in increased consumerism which in turn has created higher demand for shopping mall and multiplexes etc. Therefore, the aforesaid growth of the Indian economy has been acting as the growth driver for the overall real estate sector in India.’18

In order to demonstrate that overall economic growth will continue to act as a demand driver for real estate, presentations claim that ‘over time a high proportion of the population has been moving, and is expected to continue to move, into higher income brackets.’19 To prove this, many prospectuses reproduce charts from the National Council of Applied Economic Research survey ‘The Great Indian Middle Class’, a government publication aimed at an investor audience and the only statistical survey of the Indian populace I have seen quoted in these reports in any detail. The title ‘The Great Indian Middle Class’ – as well as the broader discourse on the ‘middle class’ in India and its use by Indian developers – helps everyone in the industry to obscure the fact that they are building for Indian elites, as there really is no middle class in India comparable to the one in the United States.


The NCAER survey divides Indians into the groups ‘Deprived, Aspirers, Seekers, Strivers, Near Rich, Clear Rich, Sheer Rich, and Super Rich’ on the basis of income. Needless to say, this research provides a skewed view of the Indian populace, one not supported by continued debates in other circles over what percentage of Indians live below the poverty line. Instead, the NCAER authors use the label ‘rich’ for half of India’s income groups. By showing everyone climbing an imagined income ladder, the study portrays poor people as potential rich people.

Real estate literature’s characterization of the poor as future consumers is an example of a very powerful but bizarre logic. Not only does it ignore the plight of the poor or other ground realities in India; but it actually manages to transform even the absence of development into a sign of possible growth. With this logic, any gap between India and other countries can be transformed into an opportunity for growth and an advertisement for investment. Parsvnath’s investor presentation reminds the viewer that whereas China has 800,000 hotel rooms and Manhattan alone has 100,000, there are only 105,000 hotel rooms in all of India, making for a remarkable investment opportunity in the hospitality sector.20


Similar arguments are made about the comparative lack of mortgage penetration, the dearth of organized retail, the meagre contribution of real estate to GDP, the slow rate of urbanization to date (30% in India against 32-34% in China and 75-80% in the US),21 and the low number of housing units in India.22 This logic miraculously transforms an infrastructure-poor country with little formal finance and an acute housing shortage into an attractive real estate investment opportunity.

Following this logic, which also assumes that India will become more like other nations over time, the lack of the kind of assets that the global real estate industry likes to buy and sell is an indication that these assets will soon be built. For example, a JP Morgan industry report argues that

Investible real estate assets in India are only USD 50-80 bn [billion] or 6-10% of India’s GDP compared with 40-50% in most developed countries. As the sector becomes more organised and conducive to institutional funding, we expect investible assets to increase to 20-25% of GDP over the next ten years. This implies investible asset creation of USD 480-600 bn, which at 40% equity funding, means a further market cap creation of USD 160-220 bn.23

All this predicted asset creation requires funding and promises returns. J.P. Morgan’s analysts have transformed the difference between India and ‘most developed countries’ (what could be seen as a shortcoming) into scope for growth, which is an advertisement for investment. This logic explains why the growth of the real estate sector itself is an ubiquitous selling point in the industry literature.24


By way of assuring would-be investors of the safety of their investments, several reports also analyze qualitative changes in the Indian real estate industry. For example, an Ernst and Young/Federation of Indian Chambers of Commerce and Industry report claims that the ‘metamorphosis’ of Indian real estate from a ‘small and fragmented market ridden with disabling policies and regulations such as the Urban Land (Ceiling and Regulation) Act, 1976, to the more organized one is happening at a rapid pace.’ The authors attribute new financing options and the ‘rise of more sophisticated real estate markets’ for the change, thus suggesting the continued investment will further the metamorphosis of the industry. They site the Jones Lang LaSalle Real Estate Transparency Index 2006 to substantiate their claims that the industry is showing ‘significant improvements.’25

This presentation of the history of the real estate industry as a rags-to-riches story of a ‘fragmented’ and ‘regional’ industry remade into a ‘transparent,’ ‘global’ one is meant to be reassuring to foreign investor readers. It implies that the trajectory of change is inevitable: India will move towards reform, towards commensurability with the rest of the world, towards a real estate system easily accessible and transparent to foreign capital.

Similarly, the current liberalization process – and discussions of it – ‘keeps alive expectations that the caps on foreign direct investment in different sectors would be relaxed over time.’26 For example, one report concludes: ‘Given India’s apparently insatiable need for funds to drive and sustain its nascent economic growth, further financial liberalization can be expected.’27 Building malls amounts to taking a bet that FDI in retail will open up further, as there currently is not enough ‘organized’ retail to justify the amount of mall space being developed.


What is the implied end result of all this growth? An urbanized, high income, consumerist society with great demand for apartment complexes, shopping malls, restaurants, and resorts. An economy integrated into the world financial-service-based economy through a growing IT/ITes industry in need of office space. A retail sector open to foreign retailers and thus demanding new kinds of retail space, national highways, ports, and storage facilities. An India convenient to business travellers with plenty of hotel rooms, airports, and spas. In their attempt to build real estate assets, Indian developers and foreign investors are gambling that their future-vision will come to pass: the Indian economy will continue its current trajectory towards liberalization and global integration, and an Indian society of ‘middle class’ consumers will emerge.

Real estate developers and foreign investors are building landscapes for Indian and foreign elites and becoming rich doing it. As we have seen, the gamble that many private equity firms, domestic real estate funds, real estate developers and others are taking presupposes a particular economic and social future for India.

However far-fetched this future may seem given the present realities of poverty, underemployment, environmental abuse, and social inequality, it is guiding the transformation of India’s land into a resource of capital accumulation for investors, developers, and landowners. The result is the production of elite landscapes – helipads, fancy private hospitals, golf courses, gated high-rises, and five-star hotels – which mark a gross misallocation of resources away from the infrastructure that India’s people need: water, sanitation, mass transport, housing. As these demands are ignored, will the lack of actual demand for elite real estate products cause the real estate market to crash? Or will the international bankrolling of a certain future bring it about?



1. Times of India, ‘Average Delhiite earns 54K,’ (accessed December 2007), 2006. Note that an average per capita income can be skewed by a few people earning very high salaries, so my estimate of housing affordability is probably conservative.

2. Private equity has been defined as investment in assets that are not publicly traded, though today private equity firms are also acquiring equity in listed assets through negotiated buy-outs. Most salient, private equity firms direct ‘their investments at acquiring a stake, often a controlling stake, with the aim of influencing the performance of companies rather than merely parking funds in financial assets incorporating varying degrees of risk and uncertainty.’ They combine the role of investor and advisor. See C.P. Chandrasekhar, ‘Private Equity: A New Role for Finance?’ Economic and Political Weekly, 31 March 2007, 1136-1145.

3. Mint, ‘It is only worth investing in the top 20-25% of funds here’, 27 August 2007.

4. Press Note 2 (2005), Government of India, Ministry of Commerce & Industry, Department of Industrial Policy & Promotion, SIA (FC Division), (accessed November 2006), 2005.

5. ‘Accelerating Transformation: Investments in Indian Real Estate’, TrammellCrowMeghraj Knowledge Centre Strategy Paper Series, 2(1), 2007.

6. ‘Checklist for the Urban Reforms Agenda Under the JNNURM: Kochi’ http://jnnurm. (accessed December 2007), 74.

7. ‘Jawaharlal Nehru National Urban Renewal Mission Overview’, Government of India, Ministry of Urban Employment and Poverty Alleviation and Ministry of Urban Development, New Delhi, 2006. The reforms include: lowering stamp duty; computerizing land registration records; introducing property title certification; streamlining the approval process for building construction; repealing the Urban Land Ceiling Reform Act; and simplifying the procedures for converting agricultural land to non-agricultural uses.

8. Mint, ‘Overseas investors look at varied fund options in real estate’, 22 August 2007. (accessed 28 August 2007).

9. Personal interview with the author, October 2007. DLF, Unitech, and Hiranandani are large Indian real estate development firms.

10. If a building is owned through a holding company registered in a tax haven like Mauritius or Cyprus, shares in the holding company can be sold to other investors, thus transferring ownership of the building and bypassing the FDI regulations.

11. Investors can either pick up a stake in an Indian real estate company at the entity level or enter a joint venture (JV) agreement with them to develop a particular property.

12. The RBI has prohibited Indian banks from lending to developers for the purchase of land; it has raised the risk weightage on real estate loans; and it has cracked down on External Commercial Borrowings (borrowing money from abroad, usually at an interest rate lower than available in India).

13. Anna Lownehaupt Tsing, Friction: An Ethnography of Global Connection, Princeton University Press, Princeton, 2005, 57.

14. Parsvnath Developers Ltd., ‘Corporate Presentation’, powerpoint, September 2007.

15. ‘Indian Realty: Super Build Up’, JP Morgan Asia Pacific Equities Research. 1 August 2007, 40.

16. Emaar MGF Land Ltd., ‘Draft Red Herring Prospectus’, 26 September 2007, 55.

17. Parsvnath Developers Ltd., ‘Corporate Presentation’, powerpoint, September 2007.

18. Parsvnath Developers Ltd., ‘Draft Red Herring Prospectus’, 29 August 2006, 49.

19. Parsvnath Developers Ltd., ‘Draft Red Herring Prospectus’, 29 August 2006, 48.

20. Parsvnath Developers Ltd., ‘Corporate Presentation’, powerpoint, September 2007.

21. ‘Indian Realty: Super Build Up’, JP Morgan Asia Pacific Equities Research. 1 August 2007, 38.

22. Industry reports invariably cite the housing gap – with figures ranging from 19-30 million units needed – without mentioning the fact that this housing shortage does not lie with the upper classes for whom they are building homes, but with the poorer classes who cannot afford their products.

23. ‘Real Estate: Realty is for Real’, Eidelweiss Securities, 5 December 2006, 34.

24. Estimates range from US$ 45-50 billion in 2010 to a staggering US$ 90 billion by 2015.

25. ‘Indian Real Estate: Opportunities and Returns’, FICCI and Ernst&Young, September 2006, 3-4.

26. C.P. Chandrasekhar, ‘Private Equity: A New Role for Finance?’, Economic and Political Weekly, 31 March 2007, 1143.

27. B. Srinivas, ‘Currying Favour Again with Foreign Investors’, Cushman & Wakefield, Global Dateline (accessed December 2007), Winter 2006, 4.