REAL ESTATE - UK investment house Dawnay Day has plans to launch real estate funds in India this year.

Its joint venture Indian business, headed by Alok Vajpeyi, is already active in real estate development projects. Vajpeyi, a former Swiss Bank Corp., BZW and Merrill Lynch executive believes foreign investment in India will increase massively in the next five years and that real estate is a key area.

As a group, Dawnay Day is committed to a contra-cyclical investment approach. India is a slightly different proposition, being an inefficient market where good local knowledge and/or local partners are almost essential for success.

Added to which, a basic under-supply of good quality office space, for example, offers up net yields of around 11%. And with 40% price appreciation in the past 18 months, India has already gained a fair amount of attention. Indeed some analysts are warning that stock and real estate prices may have peaked in the short term.

The flow of money will only increase though. PWC estimates that as much as $8 billion of private equity will flow into Indian real estate funds over the next two years.

Dawnay’s first real estate activity in India involves private-equity like investments in the hospitality sector. A hotels team has just been set up in India with a view to developing 3 and 4 star hotels.

Later this year, Vajpeyi is looking at introducing an onshore fund that can include FDI compliant investments. He adds, “We will probably also launch an offshore Indian real estate fund in the next 6 months.”

The first Indian real estate fund was launched in July last year as a venture between the Housing Development Finance Corporation and the State Bank of India. Singapore-based developer Ascendas has sponsored a $500m private equity fund. REIT issues are also likely to feature, possibly in 2007 once regulations and tax rules are formulated.

The real estate market in India is notoriously illiquid and difficult for foreign investors to tackle, but Vajpeyi is not only hugely experienced but willing to take a long term view. He says, “It will take 5-10 years to become transparent and liquid. But this is precisely why we want to be in the market now.

Only in a market with imperfections can you make a super-profit. You can get around the risk by researching the market well and understanding it.”

Last year, Dawnay Day International launched the Carpathian Fund which manages approximately €1bn of retail properties in Central and Eastern Europe. A German fund, geared 4:1, was also launched, lead-managed by Citigroup and Deutsche and raised €450m.