By Sharon Kahn, Chazen Global Insights,

For decades, developers and property buyers had no choice but to look to India’s banks for financing — but banks were reluctant lenders when it came to real estate. All that began to change in 2005 when the government allowed foreign direct investment in real estate for the first time.

“Within a year, funds and developers had raised $7 billion to $8 billion of FDI targeted at real estate investment,” said Chetan Dave, president and CEO of IDFC Real Estate Investments, speaking at the Nand and Jeet Khemka Distinguished Speaker Forum in February at the Columbia Club in New York. Already, the changes are impressive, said Dave, pointing to the construction of 250 million square feet of new office space “that“s already leased and occupied, despite the global economy.” Another 55 million square feet has been built for large retailers since 2005.

Most of that cash has already been spent, but Dave expects a second round of fundraising to take place this year. Although some very real frustrations remain, careful — and patient — investors can uncover some real opportunities in Indian real estate.

Tackling Challenges

Dave noted that the removal of three major stumbling blocks could make Indian real estate investing less frustrating — and more rewarding. In the legislative arena, for example, Parliament is considering a number of reforms, such as rent controls that protect tenants’ rights and prevent landlords from evicting renters, which in turn discourages development and upkeep of properties. Murky land title issues mean buyers worry that long-lost relatives may emerge to challenge sales. In order to erase some of the uncertainty, “the real estate private sector is actually asking for regulation, something I’ve never heard of before,” said Dave.

A second concern is India’s lack of connecting infrastructure. “In this area, we have taken an approach opposite to China’s,” said Dave. “There, the government is building roads into the vacant countyside because they expect buildings to go up on both sides of the road. In India, I’ve seen housing complexes where the residents have to walk the last mile because they haven’t built the road yet. “Here, too, Dave is optimistic, noting that newspaper editorials and growth-minded local governments are starting to recognize the need for infrastructure.

The third area involves interest rates, which Dave said the government has bumped higher 13 times in the past two years. “While every other country in the world is lowering rates, India is raising them, primarily as a way to contain inflation,” he said. As a result, although per capita income has risen from 17,500 rupees at the end of 2001 to 52,500 rupees in the first quarter of 2012, owning a home remains unaffordable to most Indians, he said.

Emerging Opportunities

Beyond investing in funds, Dave suggested a number of real estate plays that investors can make in the country. He pointed to the advent of mortgage sellers and packagers, and companies responsible for improvements in building technologies, “all the things we take for granted in developed markets are new in India,” he said.

He also noted that real estate developers look for an exit; once a property is built, they want to sell to a long-term manager. In fact, buying fully leased office buildings is a particular focus of his fund. Although returns may be lower, so are the risks. “This is an approach I couldn’t take five years ago because there wasn’t any office space!” he said.

Dave’s best advice? Find a knowledgeable local partner. “Real estate is an inherently local undertaking, and the fundamentals differ considerably,” he noted, ranging from the cost of land to the corruption of local bureaucrats.