How Do You Say 'Profit' in Hindi?

Why India? Queen's English and organized regulations are just two reasons. And it's the back office to the world.

Israel's backpackers know the scene. There you are, leaning against a coconut palm, reveling in the heat and gorgeous view. You're living like Riley on $100 a month. And suddenly, you think: Why not stay, open a hostel and make money without breaking your back?

Once your bidi buzz clears, you suddenly realize that a guesthouse in India might not be the easiest way to make an actual living, and blending into the local populace might be a tad trickier than you assumed. But it's inevitable that the hordes of Israelis descending on the subcontinent and discovering its charms would dream. And the latest reveries involve India's property market.

Dream? More like deluge. Since May 2006, more than a dozen major Tel Aviv-listed companies have unveiled plans for India's real estate market. Most are still evaluating the scene, but many are acting. India is booming and the Israelis want in, not to build some "Taj Ma'ahal" (an in-joke among local businessmen). They're targeting office and commercial space, and huge housing projects and infrastructure, too.

"The big story in India is private development and infrastructure," says Eran Cohen, manager of mutual funds at Migdal Capital Markets, who, among other things, invests in the Far East. "From 2005 to 2010, the Indian government has earmarked $300 million to $400 million for investment in infrastructure, which is more than it spent on this area during the previous 30 years."

Property & Building, which belongs to Nochi Dankner's vast investment group IDB, has pinpointed India as a major growth driver. It's already working on two projects jointly with Gershon Salkind's company Electra Real Estate.

Moti Zisser's Elbit Medical Imaging, which, despite its name is mainly a property developer, is also hard at work in India, as are no less than three of Eliezer Fishman's firms. So are Alony Hetz and BIG Shopping Centers, which hopes to duplicate the success of its open-air malls in Israel.

Also girding their loincloths for action in India are Housing & Construction, owned by billionaire heiress Shari Arison, together with Elad Properties - a privately owned concern of energy and real estate magnate Yitzhak Tshuva, best known abroad for buying New York's Plaza Hotel for $625 million and that was before renovation costs. Tshuva and Arison mean to start their passage to India with a $100-million investment.

Then there's Ocif Investment & Development, which is famously moving to take over several Russian real estate assets from its fairly new controlling shareholder, Arcadi Gaydamak - properties worth nearly a billion dollars or double that, depending on who's talking. In parallel, Ocif apparently also has designs on the subcontinent. So do American developer Shaya Boymelgreen and the Meshulam Levinstein group of Tel Aviv. The latter has allocated $50 million for investment, to be pursued jointly with Indian partners.

Chaim Katzman and Dori Segal of the Gazit real estate group, which invests mainly in the United States and Europe, is also considering taking the leap, though unlike the above companies it hasn't released a formal announcement about it. The same applies to Ramat Gan-based Arazim Investments, controlled by ultra-Orthodox businessman Meir Gorvitz.

To date corporate Israel has invested somewhere between NIS 1.5 billion to NIS 2 billion in Indian real estate. The total value of projects and investments in which Israelis are involved in some capacity could run as high as NIS 5 billion - and that's nothing compared with developers' plans for the future. Together, Israel's property magnates have already earmarked somewhere between NIS 8 billion to NIS 10 billion for investment in India. Elbit Medical Imaging is responsible for a hefty chunk of that.

Note that that figure relates to future investment: It doesn't include money already spent.

Why India? The reasons are as legion as the local dialects, but one is that while India may not have an official language, its business community speaks fluent English. Another is the high quality of education; a third is that India boasts proper, organized institutions of law and order, thanks to the foundations laid down by the British.

More reasons? With a population topping a billion, labor costs are low. The cheap cost of labor and strong education in India have also attracted a host of high-tech companies, which has fueled the boom in India's technology sector, which in itself is a driver for developers. Forget outsourced call centers telling Minnesota garage owners how to turn on their PC: think software programmers and engineers. They need space to work.

Regarding bureaucracy, on the bright side, it can be coped with here, which can't be said for another trendy target market: China. On the downside, however, the pace of Indian bureaucracy can be painfully glacial.

Eran Cohen of Migdal Capital Markets believes that India's private-sector development and the infrastructure guaranteed by Delhi can generate low-risk, high-level returns of 15 percent, Low risk, because the government uses the private sector to finance the projects and guarantees a minimum rate of return on investment.

Israelis target mainly the richer cities in southern India, such as Pune in Maharashtra, where you could find Israeli-style cappuccino a decade ago; the tech-heavy city of Bangalore in Karnataka; and Hyderabad, also a leader of India's information-technology industry.

Let the leaders explain their rationale. Segi Eitan, CEO of Property & Building Corporation, explains simply that India is a vast country with an enormous population and booming economic growth of about 9 percent a year, hence its allure to foreign investors. "India's middle class is believed to amount to 300 million people and there's a shortfall of about 20-30 million housing units, which is a big number by any criterion," she points out.

Eitan sees two prerequisites for entering India: an understanding that it's for the long-term, and the need to work with local partners to bridge gaps in the business culture. For example, Property & Building uses its own architect, working with an Indian one. India has its own version of feng-shui, Eitan explains: "For instance, the kitchen has to be in the eastern part of the apartment and the bedroom in the western part. Bad planning can ruin a project."

Property & Building is building two projects in Hyderabad, at an investment of $54 million. Because it's development, not investment per se, returns aren't relevant, says Eitan - but predicts that they'll be in the range of 35 to 55 percent. The company is also examining potential forays into Bangalore and Chennai, which is India's third-largest commercial and industrial center. Hyderabad has the biggest number of universities and local representations of computer giants such as IBM, Google and Microsoft, Eitan says, and a new airport should be inaugurated in 2008.

The word is shopping, says Eitan Bar-Zeev, CEO of BIG Shopping Centers. He thinks the potential in shopping centers in India is vast: "Today only 3 percent of retail is organized, compared with 25 percent in Thailand, which is also considered to be Third World," he remarks.

Bar-Zeev is moving to have the Israeli company buy Indian assets from a privately held company owned by BIG's controlling shareholders: himself and the brothers Yehuda and Roni Naftali.

What Bar-Zeev and the brothers own in India is land, for which they are pursuing building permits. The first has been obtained, to build a shopping center in Thana, by Mumbai. About half the project has already been leased to an anchor retail tenant named Hyper-City. Construction should start within days.

BIG has a big-name partner in India, if nor exactly a purely local one: Lehman Brothers. Bar-Zeev estimates that the assets BIG is assuming are worth about $45 million, a figure that climbs to $60 million after the investment by Lehman. The New York investment bank has undertaken to infuse another $60 million into the Indian adventures with BIG.

Bar-Zeev sees permits for a second project, in Bangalore, materializing shortly and thinks building can start in three months. There, too, Hyper-City has rented more than half the space.

With visions of returns in the range of 15 to 20 percent, his plans are ambitious. BIG intends to build four commercial centers during 2008, then to build seven more each year throughout the subcontinent.

Yaron Gelbhart will probably be reading this on the plane to India. He's flying over with his pregnant wife - twins - and two kids, and they'll be spending the next two-three years in Bangalore, where Gelbhart will be representing the Levinstein group. Being a high-tech hub, Bangalore has a varied foreign community, including many Israelis. The kids will attend a foreign school costing $1,000 a month.

Levinstein looked at Vietnam and China, too, but chose India for several reasons: its democratic, law-abiding regime; its extensive business relations with Israel; and its relative proximity.

This Israeli company means to build housing, and office and commercial space. From his office in Bangalore, Gelbhart will also be examining potential projects in the nearby city of Mysore.

"We're negotiating three, four projects and are looking at a return on equity of 30 percent or more," Gelbhart reveals. How much equity? Levinstein has earmarked $50 million, plus the same from local partners, plus loans. The bottom line is half a billion dollars, he says.

Uniquely, the Levinstein group is also considering projects to evacuate tenants and build new housing, for which local partners are a must. Previous projects of this kind in Mumbai were a bust: the concept is now to build low-cost housing in juxtaposition with luxury developments selling at more than $10,000 per square meter, he explains.

Ah, the potential is as attractive as the view from the coconut tree, but snags are rife, too. The Economist claims that India is the only Asian power with clear hallmarks of a property bubble. Housing prices have been soaring by 16 percent annually for four years, says the British weekly, which is far beyond the average increase in income. In Bangalore and Mumbai, property prices doubled in 2005-2006.

The London-based consultancy Global Property Guide says apartments in Mumbai cost three times more than in Shanghai and not much less than in Tokyo, though average income in India is far lower. The question isn't whether prices will fall: It's by how much. And this is already happening in Bangalore and Mumbai.

The lack of uniform regulation and taxation because of India's federated structure is also a downside. But Israel's latest passengers to India are upbeat. "The World Bank and investment banks expect India to sustain high economic growth," insists Gelbhart. "The growth potential is safer than Eastern Europe's. Its IT industry and call centers make it the back office of the world."