The key word for any real estate development is infrastructure, because India is notoriously lacking in it,
The government of India estimates that investment in infrastructure will need to increase from 3.5 percent of GDP at present to 8 percent of GDP by 2012, and anticipates around $320 billion in infrastructure investment over the next five years.
Several funds have already been set up to exclusively target the sector in India. Last month, Kotak Investment Advisors launched a $1 billion fund for Indian infrastructure. In February of last year The Blackstone Group teamed up with Citigroup and India’s Infrastructure Development Finance Company to form a $5 billion Indian infrastructure fund. In August, London-listed 3i Group launched a $1 billion Indian infrastructure fund. That fund will invest primarily in power, ports, airports and road projects in early-stage and mature infrastructure operations.
Deepak Bagla, a manager with the fund in Mumbai, notes that the reason that infrastructure has become such a focus is not just because the country is in dire need of roads, rail and bridges, but also because the expanding middle class is now in a position to pay for better quality infrastructure services. The sector’s opportunities, he says, can also be found in upgrading and improving electricity and water systems.
“The basic fact is that India now has come to a point where infrastructure is creating a frustrating bottleneck for future growth,” he says. “But the other key thing that has happened in the Indian system is that economics now predetermines politics. People now have the ability to pay for infrastructure, but more importantly, there is now an acceptance that if they require good infrastructure they are going to have to start paying for it.”
So far in India’s development, as in the development stage of any economy, most people have not been willing to pay for infrastructure because they weren’t able to afford it. It is only when per capita growth comes to a certain point where people have the ability to pay and start asking for better service, that the model begins to switch. Bagla says India has now hit that stage, making this the perfect time for infrastructure investment.
“Even in the capital city of Delhi, there is acute power shortage, especially peak load power, and most houses have their own diesel generators,” he says. “These generators are far more expensive on a per unit basis. If someone comes along and says ‘we will give you this power, at this price, 24 hours a day, but you have to pay for it,’ they will take it.”