Significant credit for this growth must be given to the improved Foreign Direct Investment (FDI) climate amended by the government in 2005. FDI in real estate involves acquisition of land or buildings across commercial, residential, and retail segments through funds brought in from a foreign country. Any construction and development activities from such funds are also included in FDI.

Until 2005, only non-resident Indians and persons of Indian origin were permitted to invest freely in real estate. Other foreign investors were only allowed to invest in the development of townships and similar or through a wholly owned subsidiary or a joint venture arrangement with local Indian partners. In addition to that, under the previous policy any FDI in real estate had to be approved by the Foreign Investment Promotion Board (FIPB) and Reserve Bank of India. Under the 2005 FDI policy, FDI in Indian real estate is fully permitted through an automatic route across all real estate segments, subject to certain conditions, the most significant being:

FDI is permitted in only green fields projects, and it is mandatory to complete at least 50% of the project within a five year period from the date of obtaining all statutory clearances. Investors should remember that Land `flipping' is not possible under the latest FDI policy. Investors cannot sell undeveloped projects.

For serviced housing plots a minimum land area of 10 hectares (25 acres) is required. For construction of development projects a minimum built-up area of 50,000 square metres is stipulated.

Minimum capitalization is USD 10 million for wholly owned subsidiaries, and USD 5 million for joint ventures with Indian partners. Original investments cannot be repatriated before a period of 3 years from the completion of minimum capitalization (However, the investor may be permitted to exit earlier with prior approval from the FIPB).

Prior to the relaxation of FDI policy, total foreign direct investment in India for 2004-5 was a meager 3.75 billion USD of which real estate accounted for less than 11 percent. The relaxation in FDI policy in 2005 hugely boosted that figure, as FDI in India reached around USD 8.5 billion in 2006-7, to which real estate contributed more than 26 percent. The growth in the real estate industry, especially the hospitality segment, has been further boosted by the entry of several Real Estate Investment Trusts and Real Estate Mutual Funds. Currently, there are 6 major funds investing in India with an average ticket price of 200 to 250 million US Dollars.

Despite India being in its early stage of real estate evolution, luxury residential prices have already reached levels well exceeding those in more established markets such as Thailand. A luxury apartment project along the upscale Napeansea Road in Mumbai recently sold apartments for as high as USD 15,370 per square metre (or THB 491,000). More than 70% of the inventory in this development was reportedly sold within days of the launch, to domestic buyers.

The other side of the coin?
There are some frightening stories in the press that demonstrate the need for caveat emptor (buyer beware!). For example, one of India's most expensive new projects, a gated community just outside New Delhi, was elegantly lyrical in its promises of luxurious lifestyle for its residents. But the reality of the project fell so far short that in 2007 its residents, which included members of the newly rich elite, leading members of the business community and CEOs of multinational companies, began to take militant action staging a protest in the empty swimming pool. And one should not be surprised to hear other forms of non-performances, whether in entering into joint venture deals, or in land acquisition, partnership etc... It is absolutely vital for newly entrant overseas companies to understand local partners, and to be very cautious in their due diligence process.

Typical, a mixed hospitality and residential project requires as many as 40 regulatory approvals, involving massive layers of local authorities. The Indian bureaucracy is not known for its speed of approvals, although the government is doing everything it can to reverse that reality to attract foreign investment and to create international level services. Until that is achieved, it is very important for a new overseas investor in India to have a local partner who is able to manage the multi-layer development approval process.

Land acquisition, completion and conversion of titles for development purposes, as the case may be, may take as much as 2-3 years in some cases. Consequently, the smart entrant would find a partner that already has a portfolio of strategic sites but is looking for an experienced overseas developer for execution capabilities. Execution capability is probably the single most important factor which determines success or failure of any development in an emerging market such as India, where such expertise is not readily available. Given that the real estate prices are rising rapidly, and that consolidation of land and planning consent can take years, obtaining a good site for a hospitality and/or residential project is difficult. Having a local partner with such holdings could prove to be very beneficial to foreign investors.

Another challenge facing the Indian hospitality and real estate sectors is the shortage of experienced managers and staff, especially for high-end developments. Demand for skilled employees is ever increasing. The hospitality business in India is already witnessing significant churn through attrition. Salary costs are rising by as much as 30% per year.

There can be no doubt that India presents one of the world's greatest and most exciting international real estate investment opportunities, not just now, but probably for decades to come. There is little doubt that early investors will be able to establish sustainable and profitable development companies that will have an edge over late comers. But there are risks and challenges to overcome in understanding the uniqueness of "Incredible India". Identifying and working with the right, reliable Indian partner is paramount.

Ramesh Hamal is Chief Operating Officer & Director of Development of Green Heritage Group (Thailand). He is also one of the founding partners of Global Development Group, based in UK.