The US slowdown and the fact that China is tightening its FDI policy is also aiding a remarkable shift in investment. Experts reckon that cities like Mumbai, Bangalore and the NCR region are hot investment destinations owing to their strategic importance.

Consider this: While Donald Trump Junior is setting up a $1bn fund to buy property in India, Lehman Brothers Real Estate Partners has recently acquired a 50 % stake in Unitech’s Mumbai project. Also, Taib Bank, a leading private bank based in Bahrain, recently picked up a 26% stake into a project of Anant Raj Industries.

Similarly, global financial services firm JP Morgan Chase has reportedly bought a 33% stake in a Special Purpose Vehicle (SPV) of real estate firm Alok Infrastructure and Damac Properties, a luxury lifestyle provider in the Middle East, plans to invest $5 bn over the next three years in the Indian luxury homes sector.

In a similar development, Blackstone Real Estate Partners, an affiliate of the Blackstone group, recently announced the purchase of a minority stake in Bangalore-based Synergy Property Development Services for $18 mn. The latter is a leading project and construction management company of India.

“We are excited to be doing this innovative deal and about teaming up with the best project manager in India as we build our business in the region. In the longer term, we believe there will be attractive real estate investment opportunities that follow from this partnership,” Chad Pike, senior managing director and co-head of Blackstone’s real estate group said. JP Morgan Chase and Lehman Brothers however refused to comment on the developments when contacted by ET.

But Industry experts do feel that most investors have been cashing in on the domestic market over the last six months. Shobhit Agarwal, MD, Capital Markets of global real estate consultancy Jones Lang LaSalle Meghraj (JLLM), feels that most foreign finance institutions and funds sponsored by Wall Street banks are eyeing the Indian market at this time.

“Besides the slowdown, the US recession has made money move out into more suitable markets like India, while property valuations are amenable for investment at reasonable entry costs.”

In fact, government figures on the sectors attracting the highest FDI equity inflows further validate this claim. Housing and real estate sector attracted Rs 1,510 crore in the month of April ‘08 alone, higher than the automobile industry at Rs 1,368 crore for the same month or even telecommunications at Rs 747 crore.

“Till now, most of these investors were standing in the fence. Naturally so, as the earlier valuations were very high in terms of viability of projects…however, now they are much more feasible,” says Ganesh Raj, Partner & National Leader, real estate practice, Ernst & Young.

Peter Riddoch, CEO, DAMAC Properties feels that the Indian real estate market has huge demand potential, even at this time. “We are currently looking at Tier I and Tier II cities. We are in the evaluation phase. Definitely Tier I will command a premium but overall, the country is on a great growth path.”

There are some who view the slump in real estate as a necessary correction. Kanwar Deep Singh, Chairman, Alchemist Group sums up the trend: “All private equity firms that have invested in India in the last five years have made money at the rate of 30% per annum.

We have offers from most leading private equity firms to invest and in future, we will roll out many SPVs to tap the investment,” he says. The Rs 7,000-crore Alchemist group’s arm Alchemist Realty has a JV with the Rennaissance Group, an international real estate company, and has projects worth over $2 bn afloat in India.

“The investors have seen that the real estate potential in India is huge. The returns are quite attractive. In fact, we see the trend picking up even further this year as the prices are getting more attractive for investors,” Ramesh Sanka, Chief Financial Officer at DLF said.

Late last year, DLF Ltd had sold 49 per cent stake in eight residential project SPVs to private equity investors for a total consideration of Rs 1,675 crore.

A Merrill Lynch & Co entity had bought 49 per cent equity in seven residential projects in Chennai, Bangalore, Kochi and Indore for Rs 1,481 crore. The company — headed by K P Singh — has also diluted 49 per cent stake, in another middle-income housing project in Panchkula, Haryana, to Brahma Investments for Rs 194 crore.

According to data released by the Government on Tuesday, the real estate sector, thrown open in 2004-05, saw the FDI picking up significantly between FY05 and FY08; it was Rs 171 crore in 2005-06 surging to Rs 2,121 crore in 2006-07.

“Over the last three years, there has been a build-up in investor interest. We saw the impact of that interest and euphoria for FY07 and FY08 as new townships and projects were announced. Depending on the asset class within real estate sector, the average rate of return stood at 25-35 per cent for India, against a global average of single digit return,” Sanjay Verma, Executive Managing Director, South Asia, of Cushman & Wakefield said.

“However, at the beginning of the current year we have seen some asset bubble deflation. With prices moving southwards, choppiness in the stock markets, pressure on interest rates and global issues, while deals will still happen, pricing will be the question,” Verma added.

The company is looking to tie up with a local player to build shopping malls, residential properties and other commercial spaces. “We are studying the Indian market and soon we are going to have a place in the country. India is the company’s target and we need to set up operations in the next one or two years,” Majid Al Futtaim VP Business Development Younis Al Mulla said.

He said a team of senior company officials visited India in the month of March to evaluate various options and held talks with companies here. “We are visiting India again in June to organize road shows in major cities, including Bangalore, Delhi, Mumbai and also Goa,” he added. Asked about the investments planned for India, Al Mulla said, “We do not know it yet as nothing has been finalized. We have not decided on that.”

MAF also operates hypermarkets, in joint venture with the world’s second largest retailer Carrefour, in the Middle East, North Africa, Iran, Pakistan and other markets.

Whenever it sensed an alarm, the regulator moved in to clamp down on such money flows. Even foreign venture capital funds opening shops here are asked by RBI to give an undertaking that the money they raise will not go into real estate.

In the past two years, the regulator had persuaded New Delhi to tighten investment rules that would make it difficult for foreign money to chase Indian properties. Not that it has helped significantly, with smart money managers operating from offshore tax havens finding new ways to side-step the curbs.

But in its battle against “asset price bubbles”, RBI will now face a challenge from an unlikely quarter. A month ago, the Securities and Exchange Board of India (Sebi) had paved the way for foreign funds to take a new route to enter the local property market. This would be through real estate mutual funds (REMFs).

There is nothing that can now stop a foreign institutional investor (FII) registered with Sebi or NRIs to buy units of mutual fund schemes which have invested in real estate assets. Under the new rules, which are carved out of the regular mutual fund guidelines of SEBI, an REMF can invest the entire money that it mops up “directly in real estate assets”.

This could be ready commercial properties earning rental income. In a way, it would help investors as well as developers overcome the present rule that says foreign entities can put money only for construction and development and not in ready properties.

The Sebi notification issued on April 25, ‘08 says that at least 35% of the new assets of the scheme should be invested directly in real estate assets while the balance may be invested in mortgage-backed securities, securities of companies engaged in dealing with real estate assets — a slice of these securities can also be unlisted shares, bonds and hybrid instruments. In other words, an REMF is free to invest as much as 100% of its money in ready properties.

This is a curious situation, where one arm of the government has changed rules to restrict foreign direct investment (FDI), while another regulator has found ways to let fresh money flow into properties. What RBI had done was to push changes in FDI regulations, but now foreign money can come in through the portfolio route, with the government clarifying that FIIs are not subjected to the conditions under Press Note 2 that lay down the norms for foreign investment in real estate.

This, perhaps, was inevitable. Banks are almost barred from giving loans to builders who have turned to foreign investors. The latter found the India property story irresistible, with prices having multiplied in the past few years, and higher interest rates in India compared with overseas markets helped them make a killing on such investments. If REMFs lower the fund cost for builders, it would benefit the industry in the long run.

The downside is new money could further fan property prices. Already some of the fund houses are planning to float REMFs. But these players are looking for some changes that could help REMFs take off. For instance, they want REMFs to be exempted from income distribution tax like equity-oriented MFs, where more than 65% of the assets is equity.

Second, REMFs can invest in real estate assets which are free of litigation. While this is only fair as far as investors are concerned, it could limit the scope for the scheme’s investment.

Formed in 2003, Synergy is one of the largest construction management companies in India with over 500 employees in nine offices across India and in Dubai and Kuala Lumpur.

Synergy, which is based in Bangalore, is currently managing over 100 million square feet of office, retail, residential, hotel and hospital space. The company also has plans to expand into infrastructure projects such as airports.

“We are excited to be doing this innovative deal and about teaming up with the best project manager in India as we build our business in the region. In the longer term, we believe there will be attractive real estate investment opportunities that follow from this partnership,” said Chad Pike, senior managing director and co-head of Blackstone’s real estate group.

Synergy specializes in architectural design and project management. Its portfolio of projects include well known developments such as the Medicity in Gurgaon, a hospital cluster development; Select Citywalk, a retail development in New Delhi; the HCC-ICICI Tech Park and Runwal Town Centre in Mumbai; the Park Hyatt hotel in Chennai; and the Manyata Business Park and Embassy Golf Links in Bangalore.

“Our vision for partnering with Blackstone is to combine our individual strengths and build a strong platform to deliver world class products in the Indian and global real estate market,” said Sankey Prasad, managing director of Synergy. “In addition, part of the proceeds from this transaction will make possible a wealth creation and retention program for each and every employee of Synergy, so that we can continue to foster our entrepreneurial culture as we grow.”

The top 50 emerging markets represented in A T Kearney’s recent Real Estate Opportunity Index spent a combined total of $1.7 trillion on construction in 2007, with a five-year CAGR (compound annual growth rate) of up to 6 per cent.

The US credit crunch and financial meltdown are pushing a growing number of real estate investors to look outside the United States and Europe for opportunities, it said.

Robert Zielger, vice president, A T Kearney added that international property developers are finding these large and rapidly growing markets too attractive to ignore.

“Developers grow within their local geography until they run out of opportunity or need to diversify their risk profile. For a sustainable business strategy, companies have to expand internationally during the good times to be prepared for the bad.”

Focusing on a short list of emerging markets globally, the index weighs real estate development potential based on construction spending and growth as well as a combination of country risk and ease of doing business.

The global real estate industry as a whole is not in the same desperate situation as the US, and is keeping the industry afloat. China and India are growing at such a rapid rate, that they dominated the index by a vast margin with Thailand in third place.

China’s economic boom has created a heated real estate market, driven not only by office, residential and retail demand but also by the 2008 Olympics and the 2010 World Expo. The opportunity is substantial indeed: China’s estimated construction spending for 2007 alone totals more than $500 billion.

Saudi Arabia dominated the Middle East sitting in 6th place on the whole list, with the UAE coming second in the region. Large-scale activity in the Kingdom is driven by increasing funds for mega-scale developments, stemming from its petroleum-based economy. In addition, public funds are financing schools, hospitals and low cost housing among other infrastructure and social sector projects. A recent increase in private sector investment has spurred the development of premium office, residential and retail space.

The UAE, one of the most affluent economies in the region and home of its real estate boom, is experiencing both, the advantages and disadvantages of being in the forefront. Dubai, where the real estate boom originated, is a market waiting for the impact of oversupply, but construction delays may create a soft landing. Abu Dhabi has also been a real estate star, and now needs to modernize its superstructures and office space.

The Index also notes that investors from CHIMEA have $4.1 trillion to invest, and real estate development remains an attractive destination for capital. Yet strong markets can turn sour quickly.

“Investing in global markets isn’t without risk. Investors often have a tough time getting data to assess individual properties and many investors face a myriad of murky tax laws, government regulations and political instability in some regions,” added Maktoum Al Maktoum, associate director, A T Kearney Dubai.

Property developers have long known the need to diversify geographically through a carefully balanced portfolio, while managing the risk of entering unknown markets. The report will assist in getting a better picture, globally, it said.

It has also launched a domestic fund few weeks back through which it plans to raise Rs 1,000 crore. The proceeds would be deployed into non-foreign direct investment projects. The first closing of the 6-year domestic fund would be in May, 2008.

From the Rs 3,500 crore raised through the international fund, the company has committed Rs 1,100 crore for several projects.

It has allocated 50% amount towards residential projects and 10-15% each for logistics, commercial office space and smaller ITITES parks. Construction has begun for Prestige’s project in Bangalore, Indu project in Hyderabad, Chennai and NCR, Delhi.

Kuldip Chawlla, Director, Red Fort Capital, told DNA Money, “We are investing in projects which would be worth 10,000 crore by next year. We are buying land and bringing developers to build the projects.”

Red Fort is in the final stages of discussion for investing in budget hotel chains. It plans to capitalize on its existing land bank of over 1,000 acres pan India. It has land in North Mumbai, Kolkata, Pune, Chennai, Hyderabad and Delhi.

Sistema has clinched an alliance with India Shyam Group, which has divested 51 percent stake in its telecom venture in favor of Sistema. The Sistema-Shyam joint venture will be developing a 22-acre property in Gurgaon, on the periphery of Delhi. The venture is Sistema’s first undertaking in the construction and real estate market outside Russia and Ukraine.