gri report 2011

Embracing ChangeScripting the future of

Indian Real Estate

EXECUTIVE SUMMARY

WORLD ECONOMY & INDIA

1

2

4

7

12

Table of Contents

BRINGING CHANGE

Second Generation Reforms

INDIA INVESTMENT

LANDSCAPE

CONCLUSION20

DEMAND -

SUPPLY GAP ANALYSIS

In the last two years, the Indian economy showed resilience to counter the macroeconomic changes and displayed a fast recovery through a growing Gross Domestic Product (GDP) and proactive approach to attract investment. According to World Investment Prospects Survey (WIPS) 2011-2013, while Foreign Direct Investment (FDI) inflows have increased in South East Asia and South Asia, India witnessed a mild setback in the FDI inflows in 2010. The country also witnessed a positive trend in terms of foreign investment during first half of 2011. The long term outlook of the market remains positive as a significant increase was noticed in the value of the deals and the subsectors attracting Private Equity remained diverse. The market is yet to evolve to the level of developed economy, but, the trend of Indian promoters recognizing Private Equity as a consistent source of capital continues to gain ground.

The country’s pursuit of rapid growth continues in 2011, albeit this time with a few concerns in the view of the current global economic uncertainty. This may lead to an adverse impact on the 'services and exports' sector in the mid

1

Executive Summaryterm, if the 'Eurozone crisis' and the instability in the United States of America fail to be resolved in due time. Hence, for India, it is increasingly important to maintain growth in the core sectors in order to sustain the projected GDP growth of 8%. Immediate initiatives to implement planned infrastructure and investment projects from the Central Government can sustain the desired growth momentum. There are corrections and reforms awaited in various fields such as land, manufacturing and retail which would add the much needed boost to the overall economic growth.

While the developed economies confront unstable market conditions, India is capable of steering to safer grounds by focusing on core sectors and providing the necessary impetus to the tertiary sectors to retain its growth rate. In this report, Cushman & Wakefield presents a comprehensive view of India's current economic strengths and concerns, discusses the current real estate and investment scenario and outlines those reforms that could define the future of Indian economy.

World Economy & India

2

It has been too recent in the past since the world recovered, perhaps only partially, from an economic recession, and yet another crisis situation seems to be emerging in some of the developed economies creating a global concern. The cloud over Euro zone's debt crisis continues along with uncertainties over Euro's future and the confidence in the economic leadership is slipping away from USA with its debt rating being downgraded by Standard & Poor (S&P). The message seems to be loud and clear as Robert Zoellick President, World Bank mentioned the situation entering a “new danger zone” and therefore urged primary economic actors to step up the short and long term policy measures. Further, increasing the discomfort for the global investors, investment bank Morgan & Stanley also downgraded the global GDP

forecast to 3.9% instead of 4.2% this year and to 3.8% instead of 4.5% next year. These actions clearly indicate the rising concerns over policy errors and eroding consumer confidence in the USA and the European markets. In spite of counter measures to avoid the situation from deteriorating further, international policy coordination has not proved to be useful so far.

According to the International Monetary Fund (IMF), emerging countries will continue to have stronger fiscal and financial positions vis-a-vis their more evolved counterparts.

Top 20 Global Investment Destination Markets

Source : UNCTAD World Investment Report 2011

0 50 100 150 200 250

United States

China

Hong Kong, China

Belgium

Brazil

Germany

United Kingdom

Russian Federation

Singapore

France

Australia

Saudi Arabia

Ireland

India

Spain

Canada

Luxembourg

Mexico

Chile

Indonesia

in USD Billion

2010 2009

Nevertheless, India's pursuit of higher economic growth continues amidst the global economic crisis. Government's investor friendly approach is gradually adding the impetus to make India one of the most preferred investment destinations in the world. According to World Investment Prospect Survey 2009-2012 by United Nations Conference on Trade and Development (UNCTAD), India ranked second as a foreign direct investment destination in 2010. From January to April 2011, the total FDI inflow in India was recorded at INR 291,890 million. India has also gained considerable importance with the country's outward FDI increasing substantially. During the first two quarters of

2011, the total value of acquisition by Indian

companies outside the home clocks to USD 5.89 billion covering 86 deals. The increase in fixed investment was recorded at 16% in 2010 and is expected to continue with a double digit growth during 2011. Government's outlook to boost the infrastructure sector through investment has added the much needed impetus to the related manufacturing sectors. The Government of India has already approved fund raising worth USD13.24 billion by companies through External Commercial Borrowings (ECB) or Foreign Currency Convertible bonds (FCCB) for infrastructure projects in 2009-2011. The Government also plans to increase infrastructure spending on roads, ports, airports and other crucial sectors.

We remain bullish on the domestic growth outlook in India,

in fact India is one of the most resilient Asian economies

during the global economic downturn.

Fan Cheuk WanManaging DirectorHead of Research - Asia Pacific Private BankingDivision, Credit Suisse

India is not just a rising power, it has already risen. Its

economy has risen at a breathtaking rate... we look forward

to a greater role for India at the world stage.

Barack ObamaPresident of the United States

Domestic EconomyThe recently emerged trends have also illustrated tremendous growth potential in the sectors like logistics, media and entertainment,

and retail. India's retail sector is already reaping the benefits of FDI for single brand and wholesale formats; however, the proposed FDI in multi-brand is expected to unlock the

domestic growth potential further.

While India strives to pursue a high GDP growth rate, it leaves the country susceptible to high current account deficit, rising inflation and volatile market conditions creating concerns with their downward pressure on currency.

Despite these concerns, which are likely to be short-lived as per current market sentiments, the long term economic outlook for the country looks promising with appropriate structural reforms, deregulations, and major infrastructural roll outs with definite timelines. The Government's initiatives through the Lokpal Bill and the proposed Land Acquisition, Rehabilitation and Resettlement (LARR) Bill exhibit the country's attempt to have a consistent, progressive and dynamic socio economic environment, conducive for growth.

In spite of the concerns,

which are likely to be short-

lived, the long term

economic outlook for the

country looks consistent

with appropriate structural

reforms, deregulations, and

major infrastructural roll

out accomplished in definite

timelines.

3

The economic growth so far has been gradual in approach with planned and coordinated policies

in various sectors, unveiling India's growth potential to withstand the macroeconomic instability and become a stronger, more resilient and stable economy. However, to consolidate its position further against a rather volatile global economic backdrop, India is

awaiting a second generation of reforms. The

need to have an inclusive and sustainable

growth can only be achieved with policy reforms especially with regards to land,

financial, trade, investment, infrastructure and manufacturing. The government has taken up an active role in coming up with several regulations (see table 1) and some of them are already at the advanced stages of discussion.

Reforms related to land, investment and

taxation, which have a direct impact on the real

estate sector, are briefly discussed below.

Bringing Change -Second Generation Reforms

4

The current macroeconomic environment in the

country indicates the necessity of bringing in some reforms in the taxation, investment and banking policies. The proposed banking sector reforms are expected to strengthen the rural economy. Implementation of Goods and

Services Tax (GST) could be beneficial in simplifying financial transactions at various levels by replacing the existing multiple taxation system. As per the recent estimates by the National Council of Applied Economic Research (NCAER), GST is expected to contribute anywhere between 0.9 - 1.7% of GDP to the economy on an annual basis by reducing the cascading effect inherent in the current tax structure. Despite its large scale

contribution to the economy, real estate sector

is overlooked by the proposed dual GST structure. The stamp duties, registration charges and service tax systems pertaining to land and real estate are heterogeneous among states and are likely to result in controversies

for the implementation of GST. Direct Tax

Code (DTC) is another tax reform that will be implemented in the next couple of years. Introduction of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) on Special Economic Zones (SEZs) as a part of the Direct Tax Code (DTC) may impact the profitability of some key sectors such as IT/ITeS, Biotech and Manufacturing which occupy a majority of SEZ space in the country.

Table 1 - Proposed second round of reforms

Land reforms

Land Acquisition, Rehabilitation and Resettlement Bill

�Consent of 80% of the project affected families required

�No governmental help in acquiring land for private companies for private purposes

�A comprehensive rehabilitation and resettlement scheme will be applicable as necessary

�Sharing of 20% of the appreciated land value upon each transfer (without development) within 10 years

Real Estate Regulation Bill

�Establishment of a regulatory authority

�Bringing all project details into public domain

Residential Tenancy Act

�Balancing rights and responsibilities of landlords and tenants

Financial reforms

Banking Laws Amendment Bill

�Increase access of nationalized banks to capital market

Prevention of Money Laundering (Amendment) Bill

�Bringing more financial institutions under the radar

Direct Tax Code (DTC)

�Replaces the existing Income Tax Act, 1961

�Tax rate for foreign companies will be same as Indian companies

�Implementation of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) on Special Economic Zones (SEZ)

Trade and Investment reforms

Goods and Services Tax

�Provide an all-inclusive tax structure

�Removes the cascading effect - replaces multiple indirect taxes at the state and central levels

Foreign Direct Investments (FDI) in retail & multi brand retail

�Opening up of multi-brand retail sector to foreign investments with a cap of 51%

�Stores should be opened in the cities with a population over 1 million

�Minimum capital required for FDI is USD100 million

�30% of goods and commodities should come from local suppliers

Infrastruture and manufacturing reforms

National policy for Public-Private Partnership (PPP)

�Eliminate inconsistencies in current rules

�Set up India Infrastructure Debt Fund

National Manufacturing Policy

�National Investment and Manufacturing Zones (NIMZ) - to give a boost to the manufacturing sector

�Facilitate regional development

�Increase contribution of manufacturing sector to GDP from 16% to 25% by 2025

5

To substantiate the country's economic growth policy, it is important to have a well laid out land policy, as the impact of any regulatory or policy changes pertaining to land are going to

be multifold and long term in nature. The proposed Land Acquisition, Rehabilitation and Resettlement (LARR) bill is believed to put some pressure on manufacturing and real estate sectors, where large scale expansion is dependent on land acquisition.

On the other hand, opening up of multi-brand retail sector to foreign investments will add momentum to many of the corporate backed major retail players like Wal-Mart, Carrefour

and Tesco to venture into India. FDI in the retail sector would not only lead to a substantial surge in the country's GDP and overall economic development, but would also help in integrating the Indian retail market with that of the global retail market apart from providing employment.

Continued economic growth in the country and population pressures in urban areas have

necessitated the need for large scale development and modernization of infrastructure. India would double its investments in infrastructure to USD 1 trillion during the 12th Five Year Plan that begins in

2012. The proposed policy for Public-Private Partnership (PPP) model for development could help streamlining the approval process and help

eliminate inconsistencies in current rules for infrastructure projects. The regulation will help the projects in getting higher returns thus making investments more profitable. The proposal of setting up India Infrastructure Debt Fund is also a major factor for this sector. Employment numbers are also expected to grow on the national scale. Urban areas are likely to grow and the real estate market would be positively affected by the improved infrastructure.

Though the first generation reforms have initiated a stronger economic base for India,

today, it seems to have run out of steam to close the missing links in the economy. With concerns growing over inflationary pressures, widening trade deficit coupled with the falling GDP numbers, it is evident that second generation of reforms are needed to pave the way for India to be at par with global standards. India would also need to have a proactive attitude towards strategic reforms in many other areas like agriculture, irrigation, education, delivery of public services, including primary health, urban facilities, better connectivity in rural sector and law and order.

India Investment

LandscapeDuring the year 2010, India suffered a marginal drop in the total Foreign Direct Investment (FDI) received, primarily attributed to the macroeconomic instability. FDI in real estate sector fared no different from the overall FDI inflows. The market continued to attract interest and investments from foreign investors

during the first half of 2011 and private equity

investments in the real estate segment also registered an increase in activities as compared to 2010. As opposed to 2010, when a good share of funds flowing into the realty sector was sourced from the public markets, equity funding in 2011 was noticed to be dominated by the private equity market.

7

FDI Inflows in Real Estate & Housing SectorWith the investment market yet to reach the

pre-recession levels, FDI inflows in the real

estate market remained modest during the first

quarter of 2011 in comparison to previous

quarters. The total FDI inflow in real estate

sector was recorded at INR 4,690 million

during the first quarter of 2011. This represents

approximately 3% of India’s overall FDI

investments which is lower than the investment

registered during the same time period in

2010. After a weak start, rising FDIs in the

following months signal a positive sentiment

amongst the global investors. This provides a

positive outlook for the rest of the year.

Overall FDI Inflows and FDI inflows in Real Estate & Housing Sector

Overall FDI FDI in RE & Housing

Year

FDI

Infl

ows

(IN

R B

illi

on)

Source : DIPP, Ministry of Commerce & Industry, IndiaCompiled by Cushman & Wakefield Research

Private Equity MarketFaced with the difficulty of raising funds from traditional sources such as banks and public equity etc., several real estate companies opted for private equity funding during the year 2011. Despite no significant growth in the number of deals, the value of deals being committed was seen to be on the rise. As of August 2011, a total of approximately INR 36,290 million has been recorded as private equity investment in the real estate industry. The amount of investment raised through private equity route during the first half of 2011 was noticed to surpass the total investment during the same period in 2010.

Bangalore emerged as the top recipient of private equity funding with the highest quantum of investment during the first half of 2011 followed by Mumbai and NCR. Mumbai, which had witnessed the maximum investment in 2010, saw a dip during 2011. With respect to number of deals, NCR witnessed a majority of the private equity deals followed by Bangalore and Mumbai. The quantum of deals happening in other Tier II and Tier III cities have seen a dip over 2010 levels. With

Bangalore outshining other cities, the southern

Announced Private Equity Real Estate Investment

Compiled by Cushman & Wakefield Research

-20 40

60 80

100

120 140 160

180 200

220

2008 2009 2010 2011 YTD**

Tran

sact

ion

Size

(IN

R B

illi

on)

Year

region accounted for majority of Special Purpose Vehicle (SPV) deals in 2011.

Announced Private Equity Real Estate Deals

0

5

10

15

20

25

30

2008 2009 2010 2011 YTD**

Year

Num

ber

of D

eals

Compiled by Cushman & Wakefield ResearchNote: The year 2008 has witnessed approximately 70 private

equity deals

~70

8

0

200 400

600

800 1,000

1,200 1,400 1,600

2008 2009 2010 *2011(1Q)

5153

68

962

158

1,397

155

1,310

* January to March 2011** January to August 2011

Announced Private Equity Real Estate Deals by City

Num

ber

of D

eals

Compiled by Cushman & Wakefield ResearchNote: Other cities includes Hyderabad, Pune, Kolkata,

Chandigarh, Ludhiana and NagpurPrivate equity deals include SPV and Portfolio deals

0

2

4

6

8

10

12

14

2008 2009 2010 2011 YTD*

Mumbai NCR Bangalore Chennai Other

Year

Announced Private Equity Real Estate Deals by Asset Type

0

2

4

6

8

10

12

14

16

18

20

Mixed Use Residential Office Hospitality Retail

Num

ber

of D

eals

2008 2009 2010 2011 YTD*

Year

Compiled by Cushman & Wakefield ResearchNote: Private equity deals include SPV deals only

Announced Deals

Location Goregaon, Hyderabad Lower Parel, BangaloreMumbai Mumbai

Leaseable Area (sft) 700,000 400,000 65,000 13,000,000 - Potential8,000,000 is ready & leased

Land Area (acres) NA NA NA 110

Major tenants Accenture, HP, Cognizant, NA IBM, Fidelity, Philips,TATA AIG, I Gate ANZ-IT, Alcatel-Lucent, BoB Legal, and and HCL NVIDIA, Target, Northern General and Integron Trust Bank, Monsanto

and Cognizant

Leasing status 96% 100% NA 99%

Seller Kotak Realty Fund Phoenix Infocity PVR Ltd. ManyataPrivate Limited Promoters

Buyer Tata Realty Ascendas India Infinite India Blackstone Initiatives Fund-I Trust Investment

Management

**Amount (INR mn) 5,250 1,739 1,000 8,750

Remarks

The amount mentioned is for two of the buildings, with a total super built up area of 400,000 sq ft which are completed and fully

occupied. The other three buildings, with a total area of 1.8 msf will be acquired as and when each is completed and is leased out.


While categorizing investments based on the

asset class, fund flow into the office space emerged as the highest due to the big ticket sized deals in this sector during 2011. The large size transactions in office space were primarily pertaining to investment in leased assets. Investment in leased asset which started with a few transactions in 2010 registered a significant growth during 2011. This provided an opportunity for funds to minimise risk and enabled the developers to raise funds.

Approximately INR 16,700 million of private equity investment during 2011 was in leased asset developments.

The residential sector registered the maximum

number of SPV deals till date in 2011 as investors' preference for this segment is high largely due to the ease of exit. Investment in mixed use real estate developments which had been registering a slow down over the last few years continued to witness a downward trend in 2011. Also the retail sector, which had not seen significant investment in the recent past also

9

* January to August 2011

registered moderate investment through private

equity funding.

Private Equity market in India was primarily

driven by domestic funds. The cautious

approach adopted by foreign investors could be

primarily attributed to the current turmoil in

the global economy.

In addition to the growth in private equity

investments, the number of exits in the market has also seen a growth during 2011 due to the maturity of investments.

Contrary to 2007 where the real estate industry had witnessed significant amount of funding raised through the Initial Public Offerings (IPO), the year 2011 registered a scale down in the IPO market. The volatility in the capital market due to factors ranging from inflation, hike in interest rates, as well as Euro zone debt crisis have impacted the IPO market in all the sectors, including real estate and infrastructure.

Investments in Public Equity MarketThe recent hike in mortgage rates by the Reserve Bank of India coupled with probability of price correction in major cities has accentuated a decline of real estate stocks. Despite a slowdown in the IPO market, the last quarter of 2010 witnessed a few IPO launches namely, Oberoi Realty Limited and Prestige Constructions.

Investment from Public Market

Year IPO Aggregate No. Of IPOs QIP Aggregate No. Of QIPsAmount Amount

(INR million) (INR million)

2006 1,513 1 NA NA

2007 49,646 6 NA NA

2008 NA NA NA NA

2009 4,688 1 136,709 10

2010 23,060 4 23,064 3

*2011 YTD NA NA NA NA


10

* January to August 2011

Investments in Land Banking

Buoyant investment activities were witnessed in

2007 towards land banking as developers had

started their extensive expansions and needed to

add land to their inventory. Post 2009,

increasing number of big ticket land

transactions exceeding INR 5,000 million were

registered. Close to INR 121,031 million

worth of land deals were closed till August in

2011, which however represented a slowdown of

approximately 21% over 2010. in 2011, 66% of

the total transaction value registered was

pertaining to land acquired for commercial

space. NCR (Noida) followed by Mumbai

outweighed other cities in India in terms of the

land transaction amount.

Representative Land Deals in 2011

Seller Buyer Area Total Price Price per Acre City(Acres) (INR million) (INR million)

NOIDA Authority Wave 400 65,000 162.37 NOIDA

NOIDA Authority Logix Group 200 9,750 48.75 NOIDA

Silver Oak South Asian Real Estate 100 2,000 20.00 Panvel

Mafatlal Industries Gliders Buildcon LLP 7.6 6,058 792.93 Mumbai

Aricent Group Ambience Developers 17.6 2,060 116.85 Gurgaon

SEMCO Electronics Knoor Bremse 10 500 50.00 Pune

Emaar MGF SPS-Mani Group 5.5 2,100 381.82 Kolkata

�On account of government encouragement for investments in infrastructure, it is likely to emerge as an important investment

destination for private equity firms.

�With further tightening of lending norms by financial institutions anticipated in the short term, the share of private equity funding in real estate sector is likely to grow in near future.


Investment Outlook�Developers are likely to postpone their plans

to tap the public market for funding purposes due to the current investment environment.

11

Demand: Supply Gap

AnalysisThis section is aimed to estimate the projected demand of real estate asset classes in India for the forthcoming years. The changing economic scenario across the globe has altered the sectoral dynamics and real estate was not immune to the phenomenon. The caution exhibited by the sector in the light of the varying fundamentals, have been accredited appropriately. The optimism for a brighter future revealed in 2010 has been aptly moderated. This had made it all the more imperative to revisit the previous estimates at this juncture.

This study captures the gap between the demand and supply across the office, retail, residential and hospitality asset classes. An in-depth analysis of various factors ranging from the household income, home loans, GDP, population growth and work force migration were some of the elements of the study. A close assessment of the parameters yielded very interesting results which concurred with the prevailing trends. The forecast model has been further examined to assess the impact on the demand and supply dynamics on the real estate sector.

12

Residential SectorThe residential sector was characterised by positive sentiments witnessing significant recovery across the major cities in terms of renewal of buyer confidence or improving job conditions, prices attending new high; however a cautious approach was evident in most of the residential markets. Consistent end user interest fueled demand but the growth for the same was deterred by several factors like the rising interest rates, inflation and some socio political conflicts in certain cases. The quick rebound witnessed by the housing sector in 2009 - 2010, raised a few concerns pertaining to the sustenance of this growth and stability in the sector. Confronted with high construction costs and inflation, several developers have been forced to raise the property prices. To add to it, RBI increased home loan interest rates, causing much worry for the end consumer. On the whole, higher prices and rising financing costs have resulted in dampening of property sales during the year.

In 2011, several residential markets have attained their earlier established peak levels in terms of property prices as a result of increasing construction costs and anticipated demand. Premium micro markets in southern Mumbai and Central Delhi were noticed to have surpassed the peak price levels. On the supply side, during the first half of 2011, the residential sector registered a number of project launches across the top seven cities. A detailed study of the major cities across India reveals that on a relative measure, markets like National Capital Region (NCR), Bangalore, Chennai and Kolkata have strong end user demand compared to Pune and Hyderabad.

Demand Supply AnalysisHousing Shortage still remains one of the biggest challenges for India. According to Cushman & Wakefield Research, property

markets in India from 2011-15 is likely to

witness a demand for 3.94 million housing

units growing at a CAGR of 11%.

13

Residential Demand - Supply Projection(Top seven cities)

Year

Supply Demand Gap (%)

Hou

sing

Uni

ts (i

n th

ousa

nd)

Gap

(%)

Source : Cushman & Wakefield Research

50%

52%

54%

56%

58%

60%

62%

0

100

200

300

400

500

600

700

2011 2012 2013 2014 2015

Additionally, the total housing demand across top seven cities in India from 2011-15 is expected to be around 2.36 million units. Of this total demand, the mid-ranged housing segment is expected to drive the maximum demand (45%). Majority of the developers in the top seven cities are concentrating on this segment which would help reduce the supply /demand gap. On the other hand, the affordable segment of the property market which is likely to register approximately 3 times more demand than supply might see gap increasing during the next five years (2011-15). Among the seven major cities, NCR housing market is likely to witness the maximum demand during the period 2011-15 followed by Mumbai and Bangalore. As a result of significant population migrating into the Tier I cities, these locations are likely to witness highest demand. While Mumbai residential market is expected to grow at a CAGR of 14% during this period, NCR and Bangalore are anticipated to grow at a CAGR of 11% and 10% respectively. Likewise the supply of residential units, is likely to be highest in cities of Mumbai and NCR in order to cater to the rising demand. Despite the expected increase in

Demand - Supply Projections 2011 - 2015

Housing Units (in thousand)

Gap Demand Supply

0 200 400 600 800

Bangalore

Chennai

NCR

Kolkata

Hyderabad

Pune

Mumbai


14

the demand and supply, the gap in the Tier I cities is likely to remain substantial with demand exceeding supply by at least 2.5 times

in the next five years.

Impact on Real EstateThe anticipated demand is likely to exert an upward pressure on property prices especially in markets like NCR and Bangalore where the demand supply gap is high. As a result of the relatively lower demand supply gap between 2011-15 in Tier II cities, the capital values in these cities are likely to appreciate at a slower pace compared to the Tier I cities during this time period.

With the gained momentum in 2010 in the residential market, developers in the Tier II cities launched several high end projects in order to take advantage of the positive market sentiments. As these projects are expected to reach completion over the next few years, these cities are also likely to witness a substantial supply in the high end segment. Thus the appreciation of high end property prices in these markets might witness a gradual slowdown.

The Low Income Group (LIG) and Economically Weaker Section (EWS) housing segments will continue to see a high demand – supply gap in the next five years. Several policy reforms by the Government of India and State Governments are expected to have an impact on the demand supply scenario. Several states across India are considering allocating a percentage of developed land to LIG and EWS in order to meet the demand arising from this segment. As a result, boost in supply in the affordable segment is expected.

The housing demand supply scenario from 2011- 15 and the resulting gap is likely to reduce based on the current market scenario in the next five years. Despite the current cautious stand adopted in the housing market, the cumulative demand in top seven cities from 2011-15 exceeds the supply by 2.3 times, and is likely to keep the market buoyant during the next five years. However, the upcoming supply needs to be priced judiciously along with appropriate location, infrastructure, connectivity, relevant features and amenities to ensure absorption.

The world economy that was expanding at a favorable pace in 2007-08 went into contraction in 2009 due to the economic turmoil. Recovery was evident during 2010 but it was short lived and is threatened by the crisis in the Euro zone.

The country’s economy has grown at an average rate of 8.8% during 2003-04 to 2006-07, with the 2006-07 growth rate of 9.6% being the highest in the last 18 years. Inspite of the global downturn during 2009, India's quick economic revival along with the favourable GDP growth rate, compared to the other emerging and developed nations, makes India an attractive destination. The recession had significantly impacted the office space demand in 2009, which recorded a decline of 50% compared to the previous year. This resulted in increase of vacant stock and decline in rents across most cities. In 2010, scaling up of operations by

several companies against the backdrop of

economic resurgence resulted in increased transaction activities. The demand in 2010 was recorded at 39.6 million (msf) square feet which was a significant 67% higher than 2009. Going forward, this momentum is likely to continue but at a slower pace as indicated by the performance in the first half of 2011 and the world economic sentiment.

During the first half of the year, supply was

recorded at 17.4 msf indicating a decline of 21% from the previous year same period. The overall demand for 2011 is estimated to be 37 msf registering a minor decline over the previous year. IT/ITeS sector, which was the highest demand driver, reported to lose the share of the total absorption with the take up by Banking Financial Services & Insurance (BFSI) segment increasing swiftly in select cities. As a result of changing demand dynamics and restricted supply, the vacancy levels across most cities underwent marginal changes.

Commercial Office SectorDemand and Supply AnalysisAccording to Cushman & Wakefield research, cumulative pan India demand in next five years is expected to be 267 msf, with Bangalore, NCR and Mumbai constituting 47% of the total demand. However, other cities such as Chennai, Kolkata and Hyderabad are likely to see the healthy growth in demand over the years.

Availability of talent pool for IT/ITeS sector, quality supply at comparatively lower prices and supporting government policies are a few factors which drive demand in the major seven cities. Bangalore will dominate the demand for office space throughout the period (2011-2015) where the demand is anticipated to exceed the supply. The demand trend in Bangalore has been consistent and is likely to continue. Grade A supply for seven major cities is likely to be 243.5 msf till 2015 following an inverted 'W' trend beginning from 2011 as per

Cushman Wakefield research. Majority of the supply will be operational in Mumbai, followed by NCR and Chennai during 2011 - 2015. Interestingly, cities such as Bangalore, Kolkata and Pune are likely to witness a negative supply growth over the period under consideration, primary reason being fewer planned projects owing caution exhibited by the developers.

15

Office Demand - Supply Projection(Top seven cities)

Year


Mil

lion

sft

Gap

(%)


-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

0

10

20

30

40

50

60

2011 2012 2013 2014 2015

Chennai is anticipated to see the highest real

estate activity with the highest demand and

supply growth during next five years. On the

other hand, Kolkata is expected to have lowest

demand-supply gap owing to reduced pace of

supply and second highest growth in demand

during the next five years.

Impact on Real EstateThe analysis shows that the supply will be

exceeding the demand for commercial office

spaces in the next 5 years at the prevailing

economic conditions. However, with an

improvement in the overall situation the

demand may accelerate. On the contrary, if the pace of growth is slowed, during the next five years, it may lead to increasing vacancy.

The corporate clients in such a scenario will look for better value proposition in terms of rents, maintenance cost, parking etc. while expanding and consolidating operations. Bangalore is expected to be the only exception where demand is likely to exceed planned supply in the forthcoming years, indicating the potential for developments. Scarcity of options

and lesser availability of space is likely to prevail in the city unless second generation supply increases. This may put an upward pressure on rentals in select micro markets.

Having analysed the demand trend in major seven cities, it is noted that the demand by the end of 2015 is still not likely to exceed or meet the pre-recessionary times indicating a gradual recovery mode.

16


Million sft

Gap Demand Supply


-60 -40 -20 0 20 40 60 80

Bangalore

Chennai

Hyderabad

Kolkata

Mumbai

NCR

Pune

India maintained its top position in the Nielsen Company’s global Consumer Confidence Index in the second quarter of 2011 illustrates the rich and diverse demography and indicates a good consumer base. Private final consumption in the domestic market continues to maintain a steady year-on-year growth. Despite the prevailing inflationary conditions in the economy, rising aspiration of the middle class, growing urbanization and increasing disposable income has kept the basic consumer demand intact.

The retail market in the country is maturing and becoming more complex and competitive. The economy, though reflects increasing confidence, is characterized by cautious and weighed initiatives. Retail operations are becoming more sophisticated with increased consolidations and intense competition in pricing and promotional activities. New players, international as well as national and

regional, are coming in and expanding into new categories and formats, and reaching out to a new set of customers. The industry is witnessing growing saturation in existing markets; and increasing dissemination of retail into new destinations.

Most of the upcoming developments are expected to be launched with around 60-62% occupancy levels, based on past experiences.

The overdrive in delivering large volume of

retail projects, over the last half a decade, has

been gradually replaced with quality

developments today. In the nascent stages of industry’s life-cycle, retail developments were perceived to be capable of yielding better and quicker returns leading to large-scale infusion of retail spaces. Expectedly, though unfortunately, this led to an oversupply of malls and several unsuccessful developments. In the second phase, however, the deficiencies are being realized and rectified, with the result that there have been significantly better developments in the recent times.

Commercial Retail SectorDemand and Supply AnalysisAs per Cushman & Wakefield Research, total demand for retail space in malls across India during 2011-2015 is expected to reach

approximately 57 million square feet, recording 37% compounded annual growth rate (CAGR). Additional retail space demand in the main streets is expected to be at approximately 112.57 million square feet.

17

The share of the total demand in the top 7 cities in the demand for retail space in malls across India is expected to be about 55.9% for 2011-

2015. NCR, Bangalore and Mumbai will

continue to dominate accounting for 43% of the demand. NCR is likely to witness highest cumulative demand for retail space in malls at

Retail Demand - Supply Projection(Top seven cities)

Year


Mil

lion

sft

Gap

(%)


-120%-100%-80%-60%--40%-20%0%20%40%60%80%

0

2

4

6

8

10

12

2011 2012 2013 2014 2015



Million sft

Gap Demand Supply

-10 -5 0 5 10 15

Bangalore

Chennai

Hyderabad

Kolkata

Mumbai

NCR

Pune

18

approximately 11.8 million square feet by 2015 followed by Bangalore with demand anticipated at 6.6 million square feet.

Situation of oversupply of mall space is likely to prevail till 2014. Moreover, if the organized retail growth continues with its steady trend, the demand is expected to rise above the supply levels in 2015.

Over supply situation is likely to be more pronounced in Pune as the city is likely to witness delivery of substantial supply during the period 2011-2015. The demand supply situation will be balanced in Mumbai with demand anticipated to firm up in the coming years.

The supply scenario across Tier II and Tier III cities of India is far moderate over the five year period. The demand for retail space is likely to increase in the medium term as more retailers are exploring opportunities in these cities.

Impact on Real EstateThe retail real estate market in the country is likely to see intensive screening and crucial studies on project viability before

commencement of construction. Projects which were announced during the period of volume growth (2005-2008) in retail are likely to be revisited keeping a few factors in mind – such as proximity to other similar developments, lack of requisite catchments, retailers’ disinterest. Developers interested in new retail ventures are contemplating on conducting due diligence to ascertain the success of their project. This is likely to assure them of pre-commitments from retailers prior to commencement and improve prospects of returns for the investors.

Investor community may continue to remain apprehensive of any major investments in retail developments till the time the oversupply situation balances or retailers exhibit clear commitment and preference for a designated project. Moreover, investors may, in exceptional cases, show interest or fund notable and differentiated projects on account of their standing – be it with respect to design, concept, catchment or branding. Developers and retailers are likely to take more joint initiatives to understand the core requirements of each channel partners such as for project planning, development and operations or even sharing risks at each step like revenue sharing rental arrangement among others.

If all the estimated supply meets the timelines, there would be relatively disproportionate infusion of mall supply compared to the demand projections across the major cities; with most cities likely to record higher vacancy levels. Certain cities like Mumbai or Hyderabad may also witness increased pressure on the high streets in the short term. Rentals as a consequence are likely to see upward trend. Moreover, high streets across the major cities like Bangalore, Kolkata, Mumbai or NCR are increasingly witnessing shortage of retail space. This may lead to expansion of the existing high streets or emergence of newer markets in untapped destinations with good catchment in the peripheral locations where new developments are underway.

Hospitality DemandIndia's growing potential as a leisure and

business tourism location, while having a

noticable shortfall of quality hospitality

product, makes the country a very potent choice for investors, developers and operators alike looking at establishing and expanding

their brands in the country. Post the global

economic meltdown of 2008 - 09 there have

been various trends emerging in the hospitality sector. Notable is the growth of Mid Market and Budget hotels. Hoteliers identified a burgeoning gap in this segment across most

cities in the country and planned a strong pipeline of various hotel projects across the country. Midmarket and Budget hotels are cost effective for all - the developers, the operators and the guests. They serve as an ideal model for

those hoteliers who are keen on establishing

their presence in Tier II and Tier III cities.

Another emerging segment in hospitality is that of MICE (Meetings, Incentives, and Conferences & Exhibitions). There is a need for the development of quality MICE infrastructure to penetrate deeper into the segment. The trend is significantly supported by the Government at various levels. Having identified India's share in the global MICE market being only 2%, the authorities are seeking support from various hoteliers and developers to build medium to large convention facilities to enable India as a destination, to tap into the segment.

Demand and Supply AnalysisThe delay of various hotel developments across major cities in the country, attributed to the global economic meltdown, has helped in

coping with the slow demand. In some cities, the compounded effect of slow demand and new inventory created sharp gap in demand and supply. However, the demand is showing signs of recovery. The trend will continue as

satellite cities of New Delhi like Noida, Greater

Noida and Faridabad show growth potential.

The demand in this region will grow

proportionately. Greater Noida will also host the first ever Indian Grand Prix in October 2011, which is expected to increase the hotel

profile in the area.

Impact on Real EstateBy 2015, the country will witness the

introduction of over 60,000 rooms across major

cities. The phasing of these rooms - over years

and across categories, is pertinent as the demand

segments will differ. The enhancement of the

physical infrastructure in the cities, especially

the airports, will play a major role in boosting

demand for the hospitality sector.

The expansion of peripheral locations providing land at relatively cheaper cost, which will attract residential and commercial development, thereby leading to increased hotel demand. The increase in supply will not be met with a proportionate increase in demand and corporate entities will continue to seek ways to economise post recession. This would lead to a potential drop in rates and occupancy levels in the short term and then consolidation in the medium term.

19

Occupancy Vs Stock

0

5,000

10,000

15,000

20,000

25,000

30,000

46%

48%

50%

52%

54%

56%

58%

60%

62%

64%

AOR (Estimated 2015) Stock (Estimated 2015)B

anga

lore

Che

nnai

NC

R

Kol

kata

Hyd

erab

ad

Pun

e

Mum

bai

Ahm

edab

ad


No.

of R

oom

s

Occ

upan

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ate

The global economic uncertainty rising out of the sovereign debt crisis, US credit rating down gradation, Euro zone crisis and downward pressure in Japan's economy has accelerated the shifting of the economic power axis to the emerging economies. The high growth rate and dynamic environment of the emerging Asian economies are increasingly gaining confidence of the global investors. China and India being the two prominent economic powers of the region are likely to dictate the global investment environment in the near future.

The appetite for real estate investments has subsided largely due to the slowdown in the Indian economy and increasing real estate prices. In the absence of real estate investment instruments like Real Estate Investment Trust (REIT) in conjunction with Real Estate Mutual Fund (REMF), the real estate sector suffers from several shortcomings including less transparency and lower liquidity. With these becoming active, the real estate market will get a structured monetization vehicle for the capital

intensive commercial office and retail market.

The present economic situation may be viewed as a transitory point for the real estate dynamics in India. Although, the market looks positive in

the medium term with considerable demand

across sectors, the industry seems to be plagued with thoughts of the revised land acquisition policy and rising interest rates. Simultaneously, end users and developers are feeling the heat of

Conclusiona continuous rise in construction costs and inflation. However the long term perspective suggests that the sector will continue to witness demand in all asset classes in light of the present economic conditions.

As housing shortage remains a critical element for India, the residential segment will exhibit a buoyant trend. The demand of commercial office space across the seven major cities by the end of 2015 is not likely to exceed or meet the pre-recessionary times which reflects the gradual recovery mode. As the organized retail growth continues with its steady trend, the demand is expected to rise above the supply levels in 2015.

Private Equity continued as a preferred investment option for real estate. This trend is likely to continue as lending norms get tightened further by financial institutions. The sectors like healthcare and hospitality are also showing a positive outlook in the next few years. However the growth momentum in real estate will largely depend on the overall economic outlook. As the present situation of high inflation and widening trade current deficit causes worry for investors, the Government's early action towards a prevention will be crucial. Hence implementing second generation reforms in regard to land, taxation

and FDI in retail, can prove to be crucial for sustaining the growth across sectors.

20

The GRI is a global club of senior real estate investors, developers and lenders. Its

mission is to help its members build personal relationships and work together in

creating better places as a legacy to our children. Founded in 1998, its core

constituency consists the world's leading real estate players.

The GRI runs its activities through a series of Annual Meetings focused on

different regions of the world, mainly across Europe and Asia to date. Individual

and Corporate Membership of the GRI is open to senior players in the real estate

industry that find it beneficial to belong to a global community of elite achievers

in their industry.

Cushman & Wakefield is the largest privately owned real estate services firm in

the world with more than 15,000 professionals in 234 offices in 61 countries. The

firm delivers integrated solutions by actively advising, implementing and

managing on behalf of landlords, tenants and investors through every stage of

real estate process. C&W also provides valuation advice, strategic planning and

research, portfolio analysis, and site selection and space location assistance,

among many other advisory services.

Cushman & Wakefield commenced its India operations in 1997 and today has

grown to over 1,400 employees working from the firm's New Delhi, Gurgaon,

Mumbai, Bengaluru, Chennai, Hyderabad, Pune and Kolkata offices. The first

international real estate service provider to have been granted permission by the

Government of India to operate a wholly-owned subsidiary, Cushman &

Wakefield in India is strategically poised to service the varied needs of clients

throughout the sub-continent. The firm offers a full range of real estate services

combining local expertise and experience with technology and standards of

service that are consistent across all Cushman & Wakefield's offices worldwide.

To find out more about Cushman & Wakefield, visit www.cushmanwakefield.com

DisclaimerThis report contains information available to the public and has been relied upon by Cushman & Wakefield on the basis that it is accurate and complete. Cushman & Wakefield accepts

no responsibility if this should prove not to be the case. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained

herein and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice. Our prior written consent is required before this

report can be reproduced in whole or in part.

Changes in socio-economic and political conditions could result in a substantially different situation than those presented at the stated effective date. C&WI assumes no responsibility

for changes in such external conditions.

Copyright© 2011 Cushman & Wakefield (India) Pvt. LimitedAll Rights Reserved

©2011 C

ush

man

& W

akefield

All

Rig

hts

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rved

www.cushmanwakefield.co.in

For further information on the report, please

contact:

Sitara Achreja

Director

Marketing & Communications, India

Cushman & Wakefield

Tel: + 91 124 469 5555

Fax: + 91 124 469 5566

Email: [email protected]

www.cushmanwakefield.co.in

The GRI welcomes industry leaders who find it useful

to chair a discussion at a future GRI event to contact:

Ronny Gotthardt

Senior Conference Director

GRI - Global Real Estate Institute

UK

Tel: + 44 20 8445 6653

Email: [email protected]

www.globalrealestate.org

gri report 2011

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