Will India's real estate bubble burst?

It seems destined to become one of the most ostentatious symbols of India's emerging wealth. Situated in the heart of Mumbai, the new $500m (£255m), 28-storey home of Mukesh Ambani, chairman of Reliance Industries and one of India's richest men, will tower above its surroundings: on one side, a view over the Arabian Sea; on the other, a panoramic perspective across Asia's biggest slum.

This juxtaposition of wealth and extreme poverty underlines the vast potential of India's burgeoning real estate industry, into which hundreds of millions of dollars are being poured every month.

This week, one of India's biggest property developers, DLF Universal, is undertaking the biggest domestic share offering to date, with a fundraising target of about $2.4bn.

Run by one of the country's wealthiest people, Kushal Pal Singh, DLF is expected to be valued at about $23bn once the listing, handled by banks including Citi and Merrill Lynch, is completed. The flotation on India's National Stock Exchange will not be DLF's first attempt, having aborted an effort to list last August amid concerns about its valuation.

DLF has ambitious plans to use proceeds of its IPO to accelerate its expansion by swallowing a larger chunk of the demand for new residential and commercial property.

India's economic growth last year was more than 9pc, its second-fastest level since the country gained independence from Britain in 1947.

India's young and increasingly wealthy middle-class are buying homes at an unprecedented rate. Property analysts expect demand for at least 20m new homes in five years. The overall real estate market is forecast to be seven times larger by 2015. Foreign investors, including 3i and Blackstone, the private-equity groups, have signalled an intention to grab a slice of the Indian economy with funds dedicated to infrastructure projects, which most analysts consider to be the most urgent requirement.

A property boom in India is potential good news for hordes of British retailers and leisure companies, such as Mothercare and Whitbread looking for development opportunities.

"India's real estate opportunity is genuine, large and will last a long while - a prospect not lost on developers and capital providers," said Ashish Jagnani, a Mumbai-based real estate analyst for Citi.

Since the beginning of last year, at least eight companies with an emphasis on the Indian property market have listed in London. Yesterday, seven of them were trading beneath the price at which they listed. In total, the companies have a market value of well over £1bn.

Among the glut of Aim-listed Indian property funds to have underperformed in share price terms is Trinity Capital, which raised £238m when it floated at 100p in April 2006. Despite being fully-invested in a range of commercial, hospitality and residential projects, the share price has continued to trail behind at around 90p.

Some analysts warn of the risk of a bubble in Indian real estate prices that could undermine growth prospects for the whole market.

Yesterday, a fund set up to invest in non-performing Indian assets, Dhir India Investments, announced plans to list on Aim and tap into a market for distressed assets estimated by PricewaterhouseCoopers to be worth $50bn.

But if bearish predictions of a real estate bubble are accurate, that pile of distressed assets could turn into a mountain as tall as Mr Ambani's new home.