Jan. 12 (Bloomberg) -- Smart money may have found a new home in India's underdeveloped property market.

PricewaterhouseCoopers LLP recently estimated that as much as $8 billion of private equity will flow into Indian real estate funds over the next 18 to 30 months.

Real estate funds are still new-fangled in the country; the nation's securities regulator allowed them in April 2004.

Investors are flocking to them because these could be a more rewarding vehicle to bet on India's computer software and back- office businesses than owning pricey stocks. Morgan Stanley Capital International's India information technology index has quadrupled in a little more than 2 1/2 years.

In the past few years, software and call-center companies have underpinned demand for commercial property in India.

The entire country has a little more than 70-million-square feet of A-grade office space, less than Shanghai and Beijing put together. Technology services account for as much as 85 percent of India's office space demand, says Anshuman Magazine, India managing director of real estate broker CB Richard Ellis Group Inc.

An undersupplied market means that the net yield on office property in India is 11 percent, says London-based brokerage Knight Frank LLP. That yield is among the highest in Asia.

Add to that a 20 percent to 40 percent price appreciation in the past 15 months, and office space in Mumbai, New Delhi and Bangalore starts to look like a very attractive asset class.

Supply is expanding, though demand is rising at a faster pace. By 2010, technology-related work that will get ``off- shored'' from developed countries to India may jump more than fourfold to $60 billion, according to consulting firm McKinsey & Co.

Retail, REITs

It's reasonable to expect that in the next year or two, the government in New Delhi will allow overseas retailers such as Wal-Mart Stores Inc. and Carrefour SA to enter the Indian market. As hypermarkets and shopping malls jostle for a slice of the country's total non-residential property stock, office space will get scarcer and dearer.

The Indian property market may get a further boost when the regulator allows real estate investment trusts, or REITs.

A committee set up by the Securities and Exchange Board of India, or Sebi, has recommended that REITs should be allowed to be set up as mutual funds. While that suggestion is still under consideration, Sebi has allowed high net-worth individuals -- both local and foreign -- to participate in the market through the private equity route.

Private Equity

The HDFC India Real Estate Fund, which in July 2005 gave local investors their first chance to own multiple properties with a single investment, was open to individuals with at least 50 million rupees ($1.1 million) to spare.

The seven-year, close-ended fund, jointly offered by Housing Development Finance Corp., India's No. 1 mortgage financier, and State Bank of India, the country's largest commercial lender, will allocate as much as 45 percent of its $230 million kitty to office space for technology companies, which will require 66 million square feet in the next five years.

Overseas money, too, has begun trickling in.

In June 2005, GE Commercial Finance Real Estate, a unit of General Electric Co., announced a $63 million investment in a private-equity fund sponsored by Singapore-based commercial and industrial developer, Ascendas Pte. The fund will, over a period of seven years, acquire and develop office space worth $500 million for computer software and back-office companies across India.

General Electric's participation in the deal should inspire confidence among other investors.

GE, Ascendas

GE probably understands India's potential in back-office services -- and its effect on property markets -- better than most. Under former Chairman Jack Welch, the company pioneered outsourcing in India back in 1997.

The unit, with 17,000 employees, was valued at $800 million in November 2004, when GE announced that it would sell most of the business to private-equity investors.

Ascendas, too, has experience in the Indian property market. It's the leading partner in the consortium that was formed in 1994 to build the 1.9-million-square foot International Tech Park in Bangalore, where tenants include Lucent Technologies Inc., International Business Machines Corp. and SAP AG.

India has understood that big-ticket foreign investment in real estate will follow internationally established developers. In February last year, the government significantly relaxed investment norms for overseas developers.

``Foreign investment,'' says Magazine of CB Richard Ellis, ``will change the face of the Indian real estate industry.''

Retail participation will be the icing on the cake, though for REITs to work in India, stamp duties, which vary from one state to another, must be aligned and brought down significantly to 1 percent or so from 5 percent to 15 percent at present.

For investors who can afford to provide a larger chunk of capital and leave it locked in for seven years, the field is already wide open.

To contact the writer of this column: Andy Mukherjee in Singapore amukherjee@bloomberg.net.

Last Updated: January 11, 2006 14:49 EST