The relatively small Indian real estate capital market has grown remarkably, especially in terms of private equity and debt segments, despite significant inherent risks involved, says a Deutsche Bank research report.

While private debt in the form of bank lending to commercial real estate has been fuelling growth levels, both the private equity and private debt markets are also set to grow significantly in the coming years, it added.

Enumerating the risks presently inherent in the sector, the report highlights liquidity, regulatory, overall market transparency, property market transparency and macro-economic risks as the five major risks, which are likely to continue for some more time to come.

The report also cites difficulty in foreign investment flowing into the sector following regulatory constraints. For example, foreign investors require permission from the Reserve Bank of India (RBI) for property ownership.

Similarly, for capital repatriation, investors need to apply for approval from the RBI while FDI is limited to a small set of opportunities such as townships.

Transparency is another aspect on which the Indian real estate sector ranks very low with Transparency International rating India at 88 out of 150 countries with regard to perceived corruption level.

Pointing to the need for more professional due diligence and valuation institutions, the report said: "Although market transparency has obviously improved, it is still hard to get reliable and consistent information on the Indian property market."

At the macro-economic level too, problems such as inadequate provision of public goods such as education and transport infrastructure in many regions are cited by the report, though it stated that volatility in interest rates, inflation and exchange rate risks have lessened though they still have to be borne in mind.

The report also highlights the fact that the investment market is still in its infant stage with investors facing serious challenges in finding appropriate investment products.

However, it is upbeat about the future prospects of the sector, pointing out that in 2005, nearly $850 million additional capital flowed into the country's real estate sector.

"Strong growth in private equity was driven by unlisted property funds and companies, which added around $82 million to the market," the report stated, adding that private individuals also did their bit.

Private debt or bank lending also showed "significant" growth with commercial banks lending $545 million last year. "Owing to a lack of alternatives, commercial bank lending seems to be the most efficient way of raising capital in India," the report states.

Commenting on the future outlook, the report stated that both private equity and debt markets are set to grow significantly in the coming years. This will be fuelled by further project developments and more foreign direct investment.

The public markets are, however, expected to remain constricted.