India, is transforming from an exotic locale to the next frontier for international commercial real estate investment. Already the growing economy has displaced the U.S. as the second most favored investment destination after China.

After new regulations for foreigners to directly invest in Indian real estate, many institutional and private real estate investors have established joint ventures or opportunity funds to develop office, hotel and residential projects. While the rewards could be handsome, these firms are also taking on significant risks. The real estate market in India is not as transparent as it is in US, construction quality is substandard compared to other countries, and bureaucracy and corruption can endanger new projects and create roadblocks to obtaining approvals.

U.S. investors are attracted to India because of the insatiable demand for office, residential and hotel space. The seemingly endless demand, coupled with little or no supply of quality assets, has boosted internal rates of return for new development projects to more than 20%, according to industry experts. Most development opportunity available to foreign investors is in the office, residential and hotel sectors in Bangalore, Hyderabad and Mumbai and Delhi.
India's growth has been impressive over the past several years, with the economy expanding at a rate of 7% to 8% annually and no significant slowdown in sight for another 10 years or so. Based on historic and projected GDP growth, India, along with China, will account for almost 50% of the global economy by 2045, as per some reports.

Moreover, India is an English speaking country when it comes to business, offering an additional level of comfort and familiarity to U.S. investors. Along those lines, investors are reassured by the fact that so many U.S. companies already have a presence in India. Long recognized as a locale for call center operations, India is establishing itself as a true knowledge center. Many Fortune companies like Eli Lilly, General Electric, and Hewlett Packard have set up research and development facilities in India.

Demand for office space from multinational companies has grown from an estimated 3.9 million sq. ft. in 1988 to more than 16 million sq. ft. in 2005, according to Cushman & Wakefield. Over the next two years, demand is expected to grow 14.5% annually to just over 20 million sq. ft. per year.
Investors can expect net operating income to increase a minimum of 10% annually based on increasing rental rates. Although 80% of the demand for office space is created by the IT sector, other industries such as banking and financial services, biotechnology and pharmaceutical are growing.

The expansion of new and existing companies is creating a growing middle class with significant buying power. Around 200 to 300 million of India's population can be described as middle class, which translates into expanding levels of disposable income that can be spent on upgraded housing, entertainment and retail goods and services, as per real estate experts. The Indian middle class makes $4,545 to $23,000 per year, as per National Council for Applied Economic Research reports.

India's strong economic growth and growing middle class are collectively driving a change in cultural values. Earlier a lot of people stay with their extended families, but today a lot of young people are buying their own homes and adding that industry experts have estimated that India suffers from a shortfall of 20 million homes in major metro areas. The housing shortage translates into an investment of $325 billion to $350 billion just for residential development alone.