Foreign money is pouring into Indian property funds as international investors chase potential returns of more than 20 per cent from efforts to upgrade the country’s infrastructure.

Despite the global credit crunch, financial institutions appear to be having little trouble raising billions of dollars for development projects such as new airports, roads, power stations and ports.

A $5 billion fund launched this year by Citigroup, Blackstone, Infrastructure Development Finance Company and the government-owned India Infrastructure Finance Company will close its first round of financing next month.

The initial $1 billion (£494 million) of $2 billion in equity earmarked for the fund, one of the largest in the market, has come from fewer than ten international clients. Although the commitments were made before the onset of the sub-prime mortgage crisis in the United States, bankers say that investors’ appetite for the sector remains undiminished. The second billion dollars could come from private equity firms.

“These are large commitments made by people focused on Indian infrastructure project returns,” Sanjay Nayar, chief executive of Citigroup India, said. He added that they were focused long-term and unconcerned about present market conditions.

The Government estimates that in the next five years India will need $475 billion to upgrade its infrastructure, with most of the cash likely to come from public-private partnerships. The opportunities and double-digit returns have drawn heavyweight foreign investors, including Calpers, the largest public pension fund in America.

New infrastructure funds are being announced in quick succession. ICICI Bank, India’s largest commercial bank, said on Friday that it planned to raise $2 billion. Last week, Axis Bank said that it had received “soft commitments” of $150 million for a $500 million private equity fund, which it hoped to close within the next three months. The ten-year fund will invest primarily in private companies and has targeted about 20 projects. HDFC, another Indian bank, recently raised $800 million through its overseas fund to invest in residential and commercial property and hospitality, education and healthcare projects.

An estimated $10 billion was raised globally last year for the Indian property sector by big investment banks, including JPMorgan, Citigroup, ING and Credit Suisse. India relaxed its rules on foreign investment in construction two years ago.

India’s economic growth and a huge migration of people to the cities is further fuelling the property boom. It is estimated that India will need 20 million new homes by 2012. The benchmark is China, which has more than 100 cities with a population of more than one million. India has 36. “Three hundred million people are going to be urbanised in the next decade. That is a fairly robust situation for investors,” Aashish Kalra, who manages a £250 million India property fund, said.

The last time that a property bubble burst in India - between 1995 and 2001 – prices slumped by up to 70 per cent. Sailesh Jha, an economist at Credit Suisse, said: “I don’t think there will be a crash scenario unless GDP growth slows to below 7 per cent, and we’re not predicting that.”

— Sahara, the Indian conglomerate, is trying to raise up to $7 billion through London banks to start financing the building of 217 townships across India.

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