In late February, the Indian government passed legislation aimed at promoting greater direct, foreign investment in the country’s burgeoning construction-development sector. Now, only a few weeks later, there are signs that the floodgates for foreign investment in so-called greenfield development are opening. GlobeSt.com recently reported that Tishman Speyer had announced a $250-million joint venture with India’s largest venture capital company--ICICI Venture Funds Management Co.--to pursue commercial real estate development opportunities throughout the sub-continent.

I recently returned from a fact-finding mission to India, visiting major commercial centers such as New Delhi and Mumbai. Given the outlook for the Indian economy, I’d be very surprised if Tishman’s initiative is the last or largest by an offshore real estate investor this year. In fact, it may be just the tip of the iceberg.

India Snapshot

Population : 1.02 billion, half under age 25, 75% under age 40. Population growth rate : About 2% or 20 million annually, equivalent to adding the population of Australia every year. Middle class : 20%-25% of population or 200-250 million GDP : US$600-650 billion in 2004; projected $642-695 billion in 2005. GDP growth rate : 5%-6% annually in recent years, with half the growth in service sector; forecast to grow 6%-8% annually over next few years. Language of commerce : English Government : Democracy (world’s largest) Legal system and accounting standards : similar to US and Europe Corporate governance : moving toward international best practices

It’s not difficult to make this assumption. The numbers support it: India is Asia’s fourth-largest economy and is expected to grow by almost 7% this year. India is also the fourth-largest economy in the world in terms of purchasing power; it’s the second-largest economy in the world in terms of population, and it is the world’s largest democracy. Based on these factors, plus the relaxation of direct-investment rules and the ever-growing mountain of capital seeking opportunities in emerging markets, we are forecasting a doubling of foreign investment in the Indian economy this year over last year, something like $15 billion. Estimates made by local real estate experts suggest that between 10% and 25% of this total may head into property development and investment.

The relaxation of direct-investment rules will help this flow. Prior to February’s relaxation of FDI rules, investment in India’s real estate sector was prohibited, except when used for the development of hotels; large industrial parks; and integrated townships (large scale mixed-use developments). Foreign investors were reluctant to invest under these rules because the minimum project size was 40.5 hectares (100 acres). Under the new rules, developers can move ahead with projects as small as 10.12 hectares (25 acres), making development risk slightly more manageable.

The opportunities seem limitless. While it’s hard to find numbers showing the size of the Indian real estate sector, it has been estimated that it accounts for about $42 billion of India’s $600-billion economy. However, significant growth patterns are obvious. India’s information-technology sector alone is projected to require 50 to 70 million sf over the next two to three years. In the residential sector, the Indian government estimates that there is a 20-million-unit shortfall in housing supply, and that figure grows rapidly as the country’s population explodes.

Also contributing to the foreign investment boom is that some US, European and Asian private-equity and pension funds may elect to invest either directly in real estate in India or in the funds that have been started by a number of India’s financial institutions. HDFC (Housing Development Finance Corp.), the largest housing-finance lender in the country, is setting up HDFC Venture Capital Ltd., capitalized at Rs5 billion (US$111 million), to manage property funds. ICICI Venture is launching a Rs10-billion (US$222.2-million) fund.

Real estate investment trusts are another possible source of capital. The government is considering the possibility of creating a REIT vehicle, or I-REIT, and legislation could be introduced in two to three years. Notably, the government is also being pressured by both domestic real estate circles and outside investment interests to allow direct, foreign investment in the acquisition of existing assets.

As with all foreign investment opportunities, there are potential pitfalls. Success in India will depend largely on investors conducting significant due diligence and building relationships with experienced local partners. Issues such as transparency, tax treatments and title ownership are only a few of the obstacles foreign investors and their Indian venture partners will have to tackle in order to make real estate investment a profitable play.

Investors may have to tread carefully in India’s nascent economy; the government adopted free market reforms only in 1991. But participants who get in early on the real estate opportunities emerging now can likely expect highly attractive returns. Given the vibrancy of the Indian economy and its magnetic appeal to US and other foreign corporations as a 24/7 location, it’s hard not to anticipate significant investment from real estate investors over the next five to ten years.

Dale Anne Reiss is global and Americas director of the Real Estate, Hospitality, & Construction Group of Ernst & Young LLP. She is based in New York City.