The Blackstone Group LP and other U.S. private equity shops — as well as various Middle Eastern and European investors — have ramped up their purchase of commercial real estate in India amid a recent loosening of restrictions on the part of the Modi government, but major hurdles to investment remain despite the changes, lawyers say.
Under Prime Minister Narendra Modi, India has made changes that allow for investments in smaller projects and require shorter holding times for projects, but among the challenges that remain for investors are myriad regulatory hurdles, difficulty obtaining financing from Indian banks, lack of easily attainable title information, and widely varying state and local laws.
Still, despite these hurdles, investment — particularly from private equity firms investing in office and residential — has been on the upswing.
Last year, private equity pumped nearly $1.3 billion into India office properties and nearly $1 billion into residential, roughly double what was invested the year prior, and the first quarter of 2015 saw more than $1 billion combined invested in office and real estate from private equity shops, according to data from Cushman & Wakefield.
“This year’s been very active,” said Anthony D. King of Simpson Thacher & Bartlett LLP, referring to Blackstone’s activity in India. “We’re working on a few more deals this year than in previous years.”
Blackstone earlier this summer reportedly bought a 1.1 million-square-foot India office property from fellow private equity firm Milestone Capital Advisors Ltd. for a whopping $166 million. Blackstone, which has focused mainly on office properties in India, is now reportedly the largest owner of office space in India.
A spokesman for Blackstone said the firm had no comment on its investment activity in India.
India has been open to foreign real estate investors for 10 years, and while investors from 2005 to 2008 took advantage of the new opportunity to invest in the country, most foreign investment stopped during the crash and investment has been slow to resume.
While Blackstone has been in India for years, other real estate investors have of late shown a renewed interest in the country thanks to a loosening of regulations last year.
Among the reforms by Modi, who took office last May, are getting rid of a requirement that developers hold a property for three years after completion and removing a restriction that said new projects had to be at least 25 acres. Now, new projects have to be at least 20,000 square meters, roughly a fifth the size of what they had to be prior.
“There’s a lot of interest in the space,” said Aysswarya Murthi of Reed Smith LLP. “There’s a lot of euphoria in the foreign investor community about the current government.”
In August, Goldman Sachs Group bought a minority stake in India’s Piramal Realty for $150 million, and Warburg Pincus LLC made a similar investment this summer, investing $283 million in Piramal.
Last month, Singapore sovereign wealth fund GIC Pte. Ltd. said it’s investing roughly $301 million in a joint venture for two central Delhi residential development projects.
And the Abu Dhabi Investment Authority and Qatar Investment Authority have also been active in India.
But while the latest government reforms have on the one hand encouraged more investment in India, barriers to entry still abound.
For one, U.S. firms doing deals in India have to ensure that neither they nor their partners violate the Foreign Corrupt Practices Act. That, lawyers say, is particularly tricky when it comes to local partners in India who may not realize they are subject to the FCPA.
And India has its own set of rigorous regulations, the enforceability of which is unpredictable.
“The Indian laws prohibiting bribery are not enforced frequently,” said Nandan Nelivigi of White & Case LLP.
And while private equity firms like Blackstone have directly purchased office properties in India, such deals have to be structured a particular way, Nelivigi said.
Foreigners are technically not allowed to purchase office properties — the Indian government is trying instead to encourage investment in development projects — but office properties can be purchased using either an industrial park or business center exception to that rule.
Buyers generally need to prove the asset falls into either category in order to make the purchase, and that can be challenging from a legal point of view.
“You don’t really know what the boundaries of the permitted areas are, or what the exceptions are,” Nelivigi said. “It involves creative thinking.”
Title is also a complication for such deals. Niket Rele of Reed Smith said there’s not title insurance in India like the title insurance firms in the U.S. are used to, and sometimes the title documents aren’t available electronically and investors have to sort through and view hard copies of documents.
There are also state-by-state tax laws investors have to navigate, and financing is a challenge with the government restricting bank lending to prevent over-leverage or over-exposure to the real estate sector.
“To get approvals is an absolutely painful process,” Murthi said. “This is an issue that we see mostly in the real estate sector.”
But despite these issues, investors are seeing more and more potential in India.
“I have a few clients [who] are interested in India and trying to position themselves for investing in the market, but have not pulled the trigger on any deals yet,” said Andrew T. White of Greenberg Traurig LLP.
Indeed, venturing into a market that’s still unknown to many investors often requires finding the right local partner in India, and lawyers say carefully choosing a partner on such deals is crucial.
Blackstone, King said, has “a couple of the large developers in the country that they’ve partnered with on a number of deals, and will seek to bring them in even if they’re not originally involved in the deal.”
“That helps to manage some of the on-the-ground risks,” King said. “Obviously, there is a level of risk in doing these deals. The diligence process is really key.”