Sector View

August 13, 2010

Indian Real Estate Industry

Expect BSE Realty Index to cross 2008 highs, over 250% increase from current levels
 IndianIndian
RealReal
Estate
Estate
August 13, 2010 Sector View
Sector View

Table of Contents
1. Current Scenario ........................................................ 2
2. Demand ..................................................................... 3
3. Why the real estate stocks have been beaten down by
investors…………………………………………….……12
4. The transient irrationality……………………………….13
5. Why is the Indian Real Estate sector different from the
rest of the world?………………………………………..15
6. The emerging trend……………………………………..17
7. Stocks much better investment vehicle than direct
exposure to real estate……………………………...….18
8. Appendix………………………………………………....20

August 2010 1
 Indian Real Estate
Sector View
Current Scenario
The real estate sector has witnessed a strong bull run over the last few years starting
Risk Return Matrix
2004, before plunging in second half of 2008. With the rapid economic growth in the
country, the income and surpluses in the hands of the people suddenly increased. Real
Rea
estate being one of the only two perennial & traditionally preferred asset class and with
the inborn desire of Indians to own a house, the sector became a natural choice for
Risk

these excesses to be invested. This sudden spurt in demand caught the fancy of
investors globally.
R e tu rn
Real estate sector was one of the key beneficiaries of the foreign fund inflows or hot
money. However with the global crisis in 2008, this very fact went against the sector.
Also, the crisis had its genesis in real estate sector and as a result the real estate stocks
took a steep plunge across all the countries, including India, even though India’s real
estate market was safe and didn’t face proportional impact. The sudden disappearance
of the liquidity and the fear in investor’s minds resulted
esulted in steep fall in demand. Real
estate companies in India which had taken huge leveraged positions for expansion in
anticipation of booming demand saw their market cap erode quickly and had to hold
projects due to negative cash flows. The share price
prices of these companies have fallen to
unjustified levels even though the long term fundamentals of the Indian real estate
sector haven’t changed.

While economic growth returned and the markets improved b beginning the first quarter of
2009, rationality has not come back to the real estate stocks. Though other sector
indices have appreciated many folds over the past one year, the BSE realty index
continues to underperform the broader market by a wide margin. This despite the fact
that property prices are almost nearing and in fact even crossed their 2008 peaks in
most places. Further demand has returned to the sector now and projects are being
sold out within days of their launch. It is encouraging to know that
th even the demand for
premium housing is growing fast. Most importantly the debt position and balance sheet
of real estate companies have improved significantly over the past two years. This
disconnect in high property prices and low realty stock prices canc be attributed to the
unwarranted fear of fall in housing demand due to the anticipated interest rates hike and
the fragile economic milieu in the western countries and their weak real estate stocks.
As we discuss later, based on India’s and the sectors long term fundamentals we
believe the Indian real estate sector is in a secular bull run and currently smartly
recovering out of the cyclical bear run.

Index Premium or Discount to December 2007 Levels

60%

40%

20%
While some sectors have
crossed their peak levels & many 0%
nearing the peaks, realty is still
Bankex

BSE PSU
BSE Auto

BSE Oil & Gas

BSE IT

BSE Power

BSE Healthcare
BSE CG

BSE FMCG

BSE Sensex
BSE TECk
BSE Realty

BSE CD

BSE Metal

available at almost 70% discount

-20%
to its December 2007 peak
-40%

-60%

-80%
Source: BSE India, Ideas1st Research

August 2010 2
 Indian Real Estate
Sector View
Demand
Even though post crisis the real estate sector has taken a major hit, fundamentally
things have only improved. Based on our top down approach and our strong macro view
of the Indian economy we believe the Indian real estate sector is in a multiyear, stable
growth phase. Following are a few of the key points that make us confident on the
sector.

Domestic consumption story

We believe that the growth matrix in India has never been better. With a focused, pro
reform and a stable government at the center, there is no stopping for India. Even
though the global economy is going through an unusually uncertain phase, we believe
that over medium to long term the fundamentals would prevail and see a limited impact
of the global developments on the real sector in case of a negative fallout. . Unlike most
other sectors, real estate is a pure domestic theme which is produced, consumed & sold
domestically; global developments
evelopments in US, Europe, China; et al have only an indirect
impact on demand through confidence and capital channel. It’s surprising to see that
while all experts & financial gurus are stressing to invest in Indian domestic demand
driven sectors, real estate
tate has been given a total miss.

We expect the real estate sector to grow step-in-step

step with the fast growing GDP. A
large part of the savings is expected to flow into real-estate
real for the twin purpose of
having own abode and making a stable investment.

Increasing GDP & Savings in India

1400 40

1200
36
1000
India’s saving rate is growing
steadily along with its fast 800
(US$Bn)

growing GDP 32
(%)

600

400
28
200

0 24
2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP (current US$ Bn) Gross savings (% of GDP)

Source: Ideas1st Research, Nationmaster.com

August 2010 3
 Indian Real Estate
Sector View

Demographics

Working age population

In contrast to the aging population and rising dependency ratios in many countries, India
is blessed with a young and growing population. India has amongst the best
demographic ratio globally and this would continue to improve over next three to four
decades. This comes at a time when western economies have deteriorating
demographic ratio. Even China is at fag end of its favorable demographic ratio which is
expected to peak between 2012 & 2015 and decline sharply thereafter for next few
decades. While demographic dividend is a double edge sword, if handled in a right way
it can be hugely positive for a country. The rising proportion of persons of working age
will stimulate savings as pressure on household and public budgets for the needs of
dependent children & elderly comes down. Young workers are comparatively more
mobile who are willing to take chances and ready to migrate where opportunity is
available. The rapidly growing work force implies growing savings leading to higher
demand for housing.

India has a decreasing dependency ratio

92

78

India’s savings will grow with

declining dependency ratio &
growing young population. India
64
has amongst the best
demographics in the world.

50

36
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050

Brazil Russia India China USA

Source: Ideas1st Research, Nationmaster.com

August 2010 4
 Indian Real Estate
Sector View

Increasing working age (15-64 years) population in India

64

63

62

61
Income & savings will grow as an
increasing number will join the
workforce over the next few
60
decades
59

58

57

56

55

Source: Ideas1st Research, Nationmaster.com

Exploding Middle Class

McKinsey Global Institute (MGI) predicts that the India’s middle class will reach 583
million from the current 50 million by 2025. Further it states that the average household
income in India will triple over the next two decades and it will become the world’s 5th-
largest consumer economy by 2025, up from 12th now. Another study shows that
according to Indian standards, the middle class population in India is already more than
the total population of the United States. With this exploding middle class the demand
for real estate is bound to go up unidirectionally.

August 2010 5
 Indian Real Estate
Sector View

Exploding Indian middle class

India has shown economic

progress in bringing its vast
number of poor people into the
‘middle class’ bracket. It is
expected that by 2025 almost
41% of the population will be in
the ‘middle class’ bracket

Source: McKinsey Global Institute

India has a growing per capita income

50
45
40
35
30
(Rs 000s)

25
20
Demand for real estate would
continue to grow with the 15
increasing per capita income 10
5
0
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10

Source: Ideas1st Research, Nationmaster.com

August 2010 6
 Indian Real Estate
Sector View

Changing trend towards nuclear families

The traditional ‘joint-family’ system in India is rapidly breaking up. With increasing
expenses and with more people migrating to cities for work, people are increasingly
opting for nuclear and small families. This undoubtedly means more demand for
residential segments.

Huge Surpluses
High savings

India is among the very few economies globally that has a high savings rate. A savings
rate of approximately 34% of GDP implies savings of USD 400 million annually.
Historically Indian’s have preferred two asset classes over others – gold and real estate
and an increase in savings would directly lead to an increase in demand for these asset
classes. People in urban areas are increasingly investing in second homes too.

Increasing savings with increasing per capita income

50 40

45
35
40
30
35
With increasing incomes & 25
30
savings, the demand for housing

(% of GDP)
(Rs 000s)

and retail will go up.

25 20

20
15
15
10
10
5
5

0 0
1999-00 2001-02 2003-04 2005-06 2007-08 2009-10*
Per Capita Income (Rs 000s) Gross savings (% of GDP)

st
Source: Ideas1 Research, Nationmaster.com

Parallel economy

The parallel economy or the ‘black money’ as more commonly known in India is
estimated to be anywhere between 40 to 100 percent of the stated GDP. Property is the
easiest and most attractive place to park this huge amount of unaccounted funds.
‘Cash’ component in real estate deals has been a very common practice in India. Other

August 2010 7
 Indian Real Estate
Sector View
than acting as an invisible hand supporting the real estate market, the black or
unaccounted component also provides a cushion to banks financing the sector.

Growing Income
Increasing Employment

Barring the span of 12 to 18 months of the economic slowdown, the employment the
employment for both blue and white collared workers has been increasing in India. With
the strong economic recovery in India, companies have started hiring again. This entails
increase in demand for commercial space. Further this increase in work force migration
also means more housing requirement by these corporate.

Increasing employment in India

93.00

92.25
With growing employment, the
demand for commercial space
would grow
%

91.50

90.75

90.00
2002 2003 2004 2005 2006 2007
st
Source: Ideas1 Research, Nationmaster.com

August 2010 8
 Indian Real Estate
Sector View

Inclusive growth

There has been a notable shift in the ‘growth’ in India towards a more ‘inclusive growth’.
As a result of the broader based growth and the redistributive measures by the
government, the surplus in the hands of the common man is fast increasing. The
National Rural Employment Guarantee Act (NREGA), the Sixth Pay Commission and
the government’s increased focus on infrastructure would further boost the growth at the
ground level. Moreover with manufacturing and service sector gaining traction in the
rural economy, the reliance on farm-based income has decreased substantially over the
years reducing the income volatility.

Urbanisation
Approximately only 30% of the total population or 340 million people reside in cities.
McKinsey Global Institute (MGI) predicts this number will go up to 590 million, in next 20
years. This addition of 250 million to urban areas will be at a very rapid pace requiring
only half the time compared to the 40 years (1971-2008) needed to add the last 230
million to the urban population. Such rapid urbanization would need to be supported by
rapid development in real estate may it be residential, commercial or hospitality.

Historically all developed countries have seen a boom in real estate specifically during
their fastest growing years characterized by rapid urbanization. A more recent parallel
would be China, one of the few countries to experience such high rates of urbanization.
The real estate growth there over the last decade gives a fair idea about the growth
potential of the real estate sector in India.

% of people living in urban areas in India

30.00

29.38

28.75
Demand for real estate would
grow with increasing
urbanization

28.13

27.50
2000 2001 2002 2003 2004 2005 2006 2007 2008
st
Source: Ideas1 Research, nationmaster.com

August 2010 9
 Indian Real Estate
Sector View
Perennial investment destination
People in India have a natural tendency to save and are relatively more conservative
when it comes to investments. Even today majority of financially literate people park
their surpluses in the traditionally safe haven, real estate. Further the desire to own a
home is relatively very high amongst Indians, house being the first major asset
purchased by a majority of them.

Low Mortgage to GDP ratio

The real estate industry in India is not driven by bank / non bank finance with bulk of the
purchases financed entirely from savings. The mortgage to GDP ratio in India continues
to remain one of the lowest est globally with a very low penetration of housing loans. It is
surprising to know that only about 30% of the total realty deals in the country are
financed by financial institutions. This phenomenon can partially be attributable to high
savings, huge parallel
allel economy, lack of financial knowledge amongst the public and
limited availability of credit facilities.

Interestingly high value properties are rarely financed by financial institutions, with the
portion being financed usually limited to 1/3rd of the total value. Rather it is the low cost
housing sector that forms bulk of the demand for finance.

However this situation is fast changing and the leverage ratio is improving more
favorably. The opportunity lies in the problem itself, offering a great upside to the
th real
estate demand and prices as the mortgage’s market grows.

Mortgage to GDP Ratios

100%
90%
80%
70%
60%
50%
India’s low mortgage to GDP
ratio shows the potential for the 40%
real estate demand to grow
30%
20%
10%
0%
India US UK Denmark China Developing
Asian
Countries
Source: Ideas1st Research, livemint.com

August 2010 10
 Indian Real Estate
Sector View

Real estate credit and % of total credit in India

25000 4

3.5
20000
3

2.5
15000
Credit to real estate sector in
India is at abysmally low levels. 2
However it is improving steadily.
10000
1.5

1
5000
0.5

0 0
FY 05 FY 06 FY 07 FY 08 FY 09

Real Estate Loans (US$Mn) % share of Total Gross Bank Credit

st
Source: Ideas1 Research, Jones Lang LaSalle MeghRaj

August 2010 11
 Indian Real Estate
Sector View

Why the real estate stocks have been beaten down by the
investors?
While multiple reasons have been attributed to justify the disconnect between the high
real estate prices and low realty stock prices, we believe that it’s fear, fear and fear that
is keeping investors away from the sector. Listed below are the most common fears that
we believe investors have in their minds. Need not say, that these fears are
unwarranted and do not hold in the Indian scenario.

Increase in Interest rates

The anticipated interest rate hike by RBI is one of the basic reasons driving the
investors out of the real estate sector. With the increase in cost of financing, investors
believe that the demand for real estate would dry up. However we believe that unlike in
other countries, the rise in interest rate will not have a significant impact on the demand
of real estate.

The real estate industry in India is not driven by bank / non bank finance with bulk of the
purchases being financed entirely from the savings. This can be easily deduced from
its relatively low mortgage to GDP ratio and the fact that only about 30% of the total
realty deals in the country are financed by financial institutions. Additionally, bulk of the
demand is coming from the end user and not just investors, which further mitigates the
impact on demand.

Global crisis fears

The fragile recovery in the United States, the instability in the Euro zone and the fears of
property bubble in China are depressing the realty market. However based on India’s
strong macroeconomic fundamentals and its limited exposure to the international
market we expect only a mild, if any, impact on India’s growth.

Many IPO’s scheduled for launch

The IPO’s scheduled by realty companies over the next few months are believed to be
depressing the current investment in the sector. We believe that given the low market
value of the free float stocks in the sector the scheduled IPOs will have minimal, if any
impact on the demand over medium to long term or once sentiments turn around.

August 2010 12
 Indian Real Estate
Sector View

The transient irrationality

Many property stocks in India are currently trading at over 50% discount to their NAV
and approximately 33% of their pre crisis peak price. However we feel this is mainly
because of the global meltdown in property prices and slowdown in China. Given the
sector’s domestic nature it won’t be long before the investors realize its true potential.
Following are a few more points that highlight the disconnect between the fundamentals
and the stock prices

Real Estate prices nearing 2008 peak prices:

The real estate prices have moved up sharply after plummeting during the recent global
economic meltdown. Property prices are already nearing their 2008 peak prices and
have even breached the peak in some regions. However the stock prices of these real
estate developers are yet to be adjusted upwards.

Real Estate prices in major Indian cities

In most Indian cities, real estate

prices have either crossed or are
nearing their peak levels which
had been observed in the
beginning of 2008

st
Source: Ideas1 Research, www.nhb.org.in

Stronger balance sheets:

Pre crisis, most developers had taken huge leveraged positions in anticipation of the
growing demand over the coming years. However with the melt down in second half of
2008, their cash flows deteriorated and balance sheets started bleeding. Debt levels
had grown to unsustainable levels. However these companies have put their house
back in order by slowing down their aggressive expansion plans, adopting a cautious
and conservative strategy, and even selling their land. Their debt position and cash

August 2010 13
 Indian Real Estate
Sector View
flows are much more comfortable now. Consolidated debt position of the sector as a
whole is much lower now. Despite stronger financials their stock prices continue to get
the beating.

Improving D/E of most Indian real estate companies

Anant Raj Industries Ltd

7.54
D B Realty Limited
6.84
DLF Ltd.
Peninsula Land Ltd.
Phoenix Mills Ltd
Unitech Ltd.
Balance sheet of most real estate
companies stronger than pre
crisis. D/E of most companies has
3.54 3.55
3.10 3.16
2.58
2.55 2.51
1.87
1.44
1.27
63 0.47
0.63 0.76
0.72
0.26 0.34 0.31
0.13 0.10 0.03 0.13

Jan-06 Jan-07 Jan

Jan-08 Jan-09
st
Source: Ideas1 Research, Capitaline

Business reviving smartly:

The sector has seen smart recovery in the business. Projects are being sold within days
of their launch and signs of demand revival are clearly visible. Despite this optimism
fear persists in the stock markets and investors continue to discount the stock prices for
these companies. Kindly refer to the articles in annexure.

With an eye on the above three factors we see every reason for the realty sector to
provide exceptional returns from their current levels and believe the downside to be
limited.

Proof

The signs of the revival of the sector are eminent. Projects are getting booked within
days of their launch. Further the aggression and optimism in the sector is clearly visible
in the media. Whether it is land purchase at multiple times of reserve price or the size
and volume of their advertisement in most renowned publications, you yourself can
judge. These are indirect yet significant indications of the boom ahead.

August 2010 14
 Indian Real Estate
Sector View

Why is the Indian real estate sector different from the rest of
the world?
The real estate sector in India is very peculiar owed majorly to its economic structure.
These structural differences make it vacuous to compare it with the real estate markets
in other countries.

Perennial investment destination

People in India have an inborn tendency to save and are relatively more conservative
when it comes to investments. Even today majority of the people park their surpluses in
gold and real estate, which are traditionally considered as safe havens for investment.
Further as compared to people across the globe, the desire to own a home is relatively
very high amongst Indians, house being the first major asset purchased by a majority of
them. This habit of Indians provides strong support to the demand.

Parallel economy
The parallel economy or the ‘black money’ as more commonly known in India is
estimated to be anywhere between 40 to 100 percent of the stated GDP. This huge
surplus has limited avenues other than property markets to be invested in and ‘cash’
component in real estate deals is a very common practice in India. It also reduces the
financing requirement. Other than acting as an invisible hand supporting the real estate
market, the black or unaccounted component also provides a cushion to banks
financing the sector.

This invisible force which gets even more active during slow periods is very peculiar to
the Indian economy and a major factor why the country’s real estate sector cannot be
paralleled against any other country.

Low Mortgage to GDP ratio

The real estate industry in India is not driven by bank / non bank finance with bulk of the
purchases being entirely financed from savings. The mortgage to GDP ratio in India
continues to remain one of the lowest globally with a very low penetration. It is
surprising to know that only about 30% of the total realty deals in the country are
financed by financial institutions. This phenomenon can partially be attributable to
higher savings, huge parallel economy, limited availability of credit facilities and to some
extent lack of knowledge.

Interestingly high value properties are rarely financed by financial institutions, with the
portion being financed limited to 1/3rd of the total value. Rather it is the low cost housing
sector that forms bulk of the demand for finance.

The low dependence on the financial sector again differentiates the Indian realty sector
form the sector across the world.

August 2010 15
 Indian Real Estate
Sector View

Difficulty in getting clear title land

This is probably the most important differentiator for the sector. It is very difficult to get a
clear title land in India. Further legal complications involving real estate deals take years
to be resolved. Therefore clean properties typically demand a premium up to 50-100%
of the property value. This again differentiates the sector from the realty markets world
over.

High utilization of land in India

Owing to high population density, availability of natural water resources and presence of
habitable & fertile land almost everywhere in country, there is negligible percentage of
the total land which has not been put to some use or for revenue generation. This is in
stark contrast to the western countries with low population density. Companies find it
difficult to acquire large track of land to set up their factories along with vendor’s
production facilities and residential complexes.

August 2010 16
 Indian Real Estate
Sector View

The emerging trend

Growing interests amongst NRIs

There is a renewed interest amongst Non-Resident Indians specially amongst the older
generation who are purchasing properties and houses in Indian Tier I & Tier II cities for
investment, as second homes and also increasingly with a view to spend their
retirement years in India. Encouraged by this trend a number of developers are tapping
their pockets and have conducted road-shows for the premium projects specifically
targeted towards this affluent group.

Demand for premium housing

Over the last few months, especially in the Tier I & Tier II cities, demand for premium
housing and larger properties have been growing. There have been a slew of launches
of premium and luxury residential projects. Further demand for larger residential
properties is also increasing.

Macroeconomic policies
The macroeconomic policies will play a very important role in shaping the future of the
industry. With 100% FDI being allowed in single brand retail stores and under ‘cash-n-
carry’ formats, a lot of demand for retail space in the Tier I & Tier II cities has been
generated. As and when the FDI norms are relaxed the sector is expected to benefit
from a demand spike.

Improving connectivity & mass transport

The improving connectivity and public transport is helping the cities to spread and also
rationalizing the realty prices by reducing concentration. It would an increasingly
important role in the growth of the sector.

Strong emergence of new categories for demand of land

Shopping malls, warehouses, airports, resorts, multiplex theaters, entertainment centers
like fun parks, sports facilities, educational institutes, parking facilities & venues for
public gathering for purpose of conferences, workshops, celebrations et al are all
contributing to a positive upswing to this new phase of land sale in India.

August 2010 17
 Indian Real Estate
Sector View

Stocks Much Better Investment Vehicle than Direct Exposure

to Real Estate

Real estate companies leaner, stronger & wiser

Given sound domestic fundamentals and stronger cash flows from operations we
expect the stocks of real estate companies to outperform the market. While a few
companies do have high leverage, most of the companies have substantially improved
their balance sheet over the last two years. The recovery is evident from the aggressive
participation and bidding in the recent land auctions over the last few weeks.

Real estate company stocks available at a bargain

Most real estate stocks are available at a fraction of their asset value. The current
transient irrationality in the stock prices makes them a lucrative bargain buy. There is a
clear disconnect between the property prices and the stock prices of these companies.
While the property prices are nearing all time highs, the stocks continue to be available
at a huge discount. Some stocks can even be bought for less than their book value and
many are trading at more than 50% discount to their NAV, even lower than 1/3rd of their
historic peaks.

Other than the attractive valuations we feel it makes more sense to invest in stocks
rather than property because of the NAV growth multiplier - any increase in the prices of
a flat has more than proportionate increase in the NAV of the project and consequently
of the company’s stock price. Difficulty in getting clear title properties in India, the
associated legal hassles and illiquidity further make a case for buying stocks. Also
possibility of investing in small quantities, making diversification possible is a great
advantage of investing in stocks.

Real estate: Direct Investment vs stocks

Pros Cons
Direct
Can target
More asset specific risk
Real specific market/
High transaction cost
Estate property types
Liquidity risk – takes time to

Specific cash flow buy and sell property
from rental
Valuation transparency
income
Valuation benchmark

Investment in
hard asset
Stock
Ease to diversify
Moves more in line with

Transparency of short term movement in
reporting broad equity market

Daily liquidity and
pricing

Attractive
dividend yield

August 2010 18
 Indian Real Estate
Sector View

Low market value of free float stocks

Given the relatively low market value of the free float stocks, any new interest even from
a few institutional investors can bee expected to come in at a substantial premium. The
market value of the free float of BSE Realty index is currently less than Rs.5,000
Rs.5 million.

Market value of free float* (Rs. Billions)

4500
Market value of free float of
realty stocks is relatively very 4000
low
3500

3000

2500

2000

1500

1000

500

0
Healthcare

BSE IT
Bankex

BSE FMCG
BSE CD
BSE Auto

BSE Metal

BSE Realty
BSE CG

BSE Oil &

BSE Power
Gas
BSE

Source: Ideas1st Research, BSE

August 2010 19
 Indian Real Estate
Sector View
Annexure

Annexure-I: Industry classification

The Real Estate sector can be classified in several ways, one being based on the origin
of demand as: Residential, Commercial and Hospitality. These can further be sub
classified to get a deeper understanding.

Residential

Residential segment contributes most to the total real estate demand at approximately
687 mn sq. ft. or 63%. The strong desire of Indians to ‘own’ a home, now supported by
the rising income explains this increasing demand. However this demand is very
concentrated with about 80% of it coming from the top seven cities in India. This is not
surprisingly given their huge migrant working population and the booming corporate
sector. NCR surpasses all other cities with 114 million sq.ft. of demand projected
through 2008-2012, followed by Bangalore and Chennai that account for 16% each of
the total demand projected in this segment.

Low Cost Housing

A subdivision of the residential segment, Low Cost Housing or Low Income Housing
forms a large chunk of the total housing requirement. With more than 55% of the total
urban population either living in one room accommodations or slums, the segments
offers a lot of potential for growth. The increasing incentives and subsidies from the
government for the development of low cost housing are attracting a lot of interests of
the developers recently.

Commercial Space

Commercial space typically demands a premium over residential and other properties.
However the commercial sector was hit the worst during the economic meltdown in
second half of 2008. Commercial rentals in top metros plummeted by more than 30-
40%.

Lately, following the residential segment, the commercial sector has started showings
signs of recovery. With the economy back on the higher growth trajectory and the
ambitious hiring plans of companies especially in the IT /ITES sector, the demand for
commercial space is poised to go up. According to industry estimates new demand for
approximately 243 mn.sq.ft. of commercial space across India would be generated
between the years 2008-2012. While Bangalore leads with highest demand for
commercial space, NCR is closing up owed to the emergence of business districts like
Gurgaon and Noida over the past few years.

Retail

Increasing incomes, changing spending habits and favorable consumer demographics,

all have attracted many big players to this segment, like Reliance and Bharti amongst
others, along with their well-established foreign partners like Walmart, Carrefour etc.
Retail sector in India had been primarily un-organized unlike most other important

August 2010 20
 Indian Real Estate
Sector View
sectors and the big players want to change the rules of game by providing better
shopping experience and bringing cheaper prices. Government is mulling to liberalize
the retail sector by allowing foreign companies to set up their retail stores in India, which
if liberalized, would further give a boost to demand for retail space. The segment has
already seen multifold demand growth over the last couple of years. Though Tier I cities
still form the bulk of retail space demand, Tier II and Tier III cities are fast catching up
and have caught the interests of leading retailers and developers alike. Of the total
estimated retail demand of 95 mn.sq.ft. in India between 2008-12, NCR ranks first with
demand of approx. 19 mn.sq.ft. followed by Mumbai with 15 mn.sq.ft.

Hospitality

With 73 mn.sq.ft. of hospitality demand by 2012, the segment though small is growing
fast. Again Bangalore and NCR lead the segment with an expected 31 mn.sq.ft or 43%
share of pan-India demand projection followed by Mumbai with 12 mn.sq.ft.

Metros with their booming corporate sector are experiencing a fast growing demand for
‘star’ hotels and service apartments. Increasing discretionary spending, changing trend
in family vacations, and increasing domestic & international travelers are the main
forces behind the growing demand.

August 2010 21
 Indian Real Estate
Sector View

Annexure-II: Lodhas sell 10% in tallest residential project in

Mumbai
By: Kausik Datta & Maulik Vyas

17th August 2010(economictimes.indiatimes.com) – Real estate firm Lodha

Developers has raised Rs 500 crore by selling a 10% stake in a project to develop a
117-storey residential tower in Mumbai to HDFC Venture Funds.

“The deal shows the investor’s appetite for quality real estate projects in India,” said
Abhisheck Lodha, the managing director of Lodha Developers.

HDFC Venture Funds is promoted by mortgage leader HDFC. Other investors include
GIC, Temasek and Abu Dhabi Investment Authority.

The deal is the second-largest private equity investment in India’s realty space and puts
the valuation of the project at Rs 5,000 crore, two-and-a-half times its estimated cost.

Hindustan Construction Company (HCC) sold a 74% stake in a commercial building in

Mumbai’s eastern suburbs to the IL&FS Milestone Fund for Rs 575 crore two months
ago, a valuation of Rs 775 crore.

HCC sold stake after the completion of the building, while Lodha managed to bring in a
PE investment one month after the project was announced. World One, claimed by its
developers to be the world’s tallest residential tower, will be completed in 2014.

“It’s a very rare deal in India,” said Anuj Puri, chairman and country head of Jones Lang
LaSalle Meghraj India. “In India, the developers complete projects with the money they
get from the booking. They ( the developers) typically go to PE investors at a later
stage.”

The project has received bookings worth Rs 1,200 crore in the first month, said Mr
Lodha. In addition, Lodha Developers has invested Rs 500 crore as equity contribution
towards the project. “With the PE fund, one may say that we will achieve the financial
closure of the project,” he added.

“HDFC’s investment will also add credential to the project,” said Pranab Datta, VC &
MD, Knight Frank India. “Lodha Developers was left with the option of selling stake to
PE investors after it shelved plans to raise money from the primary market.”

Lodha Developers has deferred its initial share sale, after receiving Sebi approval, as it
found the volatile stock market situation would not yield the required valuation of the
company.

In June, Lodha Developers announced its plan to construct what it described as the
world’s tallest residential building in a 17-acre plot located in closed textile unit, known
as the Shrinivas Mill, in Lower Parel, central Mumbai, which it had bought nearly five
years ago.

Besides an assortment of luxury flats Lodha Developers will also construct a two-acre
car park in an adjacent area.

Once complete, the tower will be almost 500 metre, dwarfing Queensland Number One
in Australia, which has a height of 323 meter.

The tower will be higher than some iconic global landmarks including Sears Tower in
Chicago, Jin Mao Building in Shanghai and Empire State Building in New York.

August 2010 22
 Indian Real Estate
Sector View

Annexure-III: J P Morgan, Baring in race for stake in

Embassy Group SPV
By Raghuvir Badrinath
17th August 2010(sify.com) – Embassy is looking at Rs 2,400 crore public offer

Bluechip global private equity funds — J P Morgan and Baring Private Equity Partners
— are in the race to invest Rs 180 crore in a 14-acre residential project being developed
by Bangalore-based developer Embassy Group.

Embassy Group is building the project near the Hebbal flyover, north of Bangalore with
2 million square feet of residential development. Embassy Group is developing the
project on a land historically-owned by Kirloskar Group in a 67 : 33 revenue share
agreement.

This round of private equity fund raising comes close on the heels of the company
detailing its intent to go public in the near future. Embassy Group during the past month
filed for a Rs 2,400 crore initial public offer. Edelweiss Capital, Nomura, UBS Securities
and Citigroup Global Markets are the book-running lead managers to the issue.
According to information with PE funds, Embassy may also look at a pre-IPO placement
of up to Rs 1,175 crore. The management of Embassy Group could not be reached for
comments.

The company has developed nearly 25 million square feet of residential, office and retail
space with a strong presence in Bangalore in addition to some pockets in Southern and
Western market. Embassy is also looking to expand its presence in Malaysia and
Serbia. Embassy has built some landmark office spaces in Bangalore for a host of
clients including Alcatel-Lucent, Atos Origin, ANZ, Cognizant, Computer Science
Corporation, Fidelity, Geometric, IBM, LG Soft India, McAfee, Mercedes-Benz,
Microsoft, NetApp, Nokia Siemens Networks, Supervalu, Target, Vodafone and Yahoo!

If the private equity investment sails through, it may as well signal a sort of revival of PE
appetite in Bangalore’s real estate market. The real estate market in Bangalore, during
the peak of 2007, was the darling of the PE players and it blipped off the radar as
economic downturn took a strangle-hold of this sector as realtors were faced with
unsold inventory leading to bulging debt-pile.

The PE funding into the Bangalore realty market since 2007 has been few and far
between with the sole exception of Century Group raising a record $125 million from
Goldman Sachs. Post that Adarsh Group is also understood to have raised Rs 125
crore from Kotak Private Equity besides a handful of other small PE deals.

According to Embassy, it intends to undertake a combination of built-to-suit projects and

projects done without pre-commitment as they plan their expansion.

August 2010 23
 Indian Real Estate
Sector View

Annexure – IV: DLF's Rs 4 crore luxury homes draw big

numbers
By: Paramita Chatterjee

22nd March 2010 (economictimes.indiatimes.com) – DLF, the country’s biggest realtor,

has sold three-fourths of its upscale flats in central Delhi at Rs 4 crore apiece within two
days of launch in a sign that demand for such properties is alive and well despite the
drift towards affordable housing.

DLF had launched the third and final phase of 150 flats — each measuring 3,000 sq ft
or more — of Capital Greens near Moti Nagar last Friday. A DLF spokesman confirmed
the sale. “The company has received an overwhelming response,” he said, adding that
the final number will be known on Monday.

The rush for DLF flats is further evidence that the Indian realty sector’s recovery is real
and gathering pace after the sharp spurt in demand for affordable houses in recent
months. Besides DLF, developers such as Ansal API, Orbit and Uppal are developing
high-end apartments across India. Delhi-based Ansal is looking to launch upscale
properties in Lucknow later this year. "The prices will be in the range of Rs 5-10 crore
for villas of 4,000-5,000 sq ft,” said a spokesman.

Orbit Corporation’s boutique homes in Mumbai will be sold for nearly 50,000 a sq ft
while the Uppals are developing boutique luxury housing projects in the capital in areas
such as Vasant Kunj and Shanti Niketan where the rates would be around Rs 40,000 a
sq ft.

Analysts say with the economy in shipshape and the job market ticking again,
consumers are regaining the confidence to invest in swank projects despite the RBI’s
surprise interest rate hike last Friday. In suburbs and extended suburbs, prices are
more a function of location, supply and job creation, said a real estate analyst who did
not want to be named as he is not authorised to talk to the media.

No market illustrates this facet than Delhi where the property market has long been
beset by a space crunch, he said, adding that the stellar response for DLF flats should
come as no surprise.

After the latest round, the Capital Greens project’s total sale value has shot up to
around Rs 3,600 crore. In the first phase, DLF sold 1,450 flats for Rs 1,300 crore; in the
second, it sold 1,250 flats for Rs 1,700 crore and in the last, 300 flats were sold for Rs
600 crore.

The company bought the 38-acre plot in 2007 for Rs 1,650 crore.

Even DLF, a name typically bracketed with luxury housing, veered towards affordable
properties after the market got hammered by the slowdown as buyers kept away and
lending dried up. But a return to upscale properties may be in order with residential
prices in metros such as Delhi and Mumbai expected to firm up further in the next few
months due to a paucity of supply, said analysts.

August 2010 24
 Indian Real Estate
Sector View

Annexure – V: Unitech to develop Mumbai slums into luxury

homes
By: Sumit Sharma

13th January 2010 (livemint.com) – Unitech Ltd, India’s second biggest developer,
expects its share of sales from redeveloping Mumbai slums into luxury apartments to
triple in three years and boost profit, managing director Sanjay Chandra said.

Unitech, based in New Delhi, is developing 100 acres of land in north Mumbai’s
Santacruz area, near the city’s airport, by knocking down shacks and building
apartments in towers serviced by high-speed elevators. Slum dwellers will be resettled
in smaller apartments in separate buildings on part of the cleared land.

The world’s second fastest pace of economic growth is boosting incomes for India’s
urban population and spurring demand for houses that cost at least 25 crore in a
Mumbai suburb.

“Mumbai is a lucrative market and prices tend to go up firmly and demand is usually
strong,” said Jigar Shah, head of research at Kim Eng Securities India. “The measures
to develop slum areas and build affordable homes will help lift return on equity and
profit.”

Mumbai properties may account for 40% of revenue in three years, up from the current
12%, Chandra said in an interview in Mumbai.

The government’s plan to redevelop shanty towns such as the 535-acre Dharavi slum
near the new Bandra-Kurla business district has been delayed because of political
indecision and disagreements, said Jockin Arputham, founder and president of the
National Slum Dwellers Federation.

“It’s not easy to do redevelopment as moving people is a complex task,” said Anshuman
Magazine, New Delhi-based managing director of CB Richard Ellis for South Asia. “Not
everyone may want to be relocated for economic reasons, not to mention legal and
other regulatory issues, and the state of the real estate market.”

Unitech shares closed up 0.4% at Rs88.75 each in Mumbai trading. They more than
doubled last year compared with an 81% increase in the Sensex.

Unitech is also building budget homes. It has cut the time to build low-cost housing by
40% as it tries to boost revenue in a nation facing a shortage of 24.7 million homes.

August 2010 25
 Indian Real Estate
Sector View

Annexure – VI: IL&FS fund to invest $122 mn in property

firm: sources
By: Reuters

10th June 2010 (livemint.com) – Private equity firm IL&FS Milestone Fund is set to
invest Rs575 crore ($122.3 million) for a 74% stake in a property unit of Hindustan
Construction Co, two sources with direct knowledge of the matter said.

The deal could be announced on Thursday, said one source, who could not be
identified because he was not authorised to speak to the media. A spokesman for
Hindustan Construction declined comment when reached by Reuters. Unlisted HCC
Real Estate has built a corporate complex in suburban Mumbai.

IL&FS Milestone is a joint venture between IL&FS Investment Managers and Mumbai-
based Milestone Capital Advisors.

Money Matters Financial Services, headed by former Credit Suisse banker Pramod
Kasat, was the sole advisor to the transaction, sources said.

The Mint newspaper had reported on Thursday IL&FS Milestone Fund was in advanced
talks to acquire HCC Real Estate.

Blackstone Real Estate Group, a unit of US private equity Blackstone Group and an unit
of Morgan Stanley were also in the fray, the paper said.

August 2010 26
 Indian Real Estate
Sector View

Annexure – VII: Commercial real estate outlook optimistic

By: Ravi Sinha

15th April 2010(economictimes.indiatimes.com) – Once hailed as the

growth engine of the real estate industry, commercial realty suddenly became
a liability for developers and the ready prime projects had no takers, during the
recent economic slowdown. With a shortfall in demand and liquidity crunch,
'affordable housing' gained importance and the focus of even commercial
realtors took a shift. Many of the upcoming commercial realty projects came to
a standstill and instead, more affordable housing projects were launched.
While office spaces remained unoccupied, the retailers in malls bargained hard
to renegotiate prices and to include minimum guarantee clauses in the
agreement, or enter into revenue sharing agreements.
As per a report by real estate consultancy firm, Cushman & Wakefield, the year
2009 ended with a 29 per cent decline in space absorption, compared to the
previous year. The total absorption of commercial space across major Indian
cities stood at 26.3 million sq ft in 2009, compared to 37 million sq ft in 2008.
Mall supply during 2009 fell short by 60 per cent, as only 5.7 million sq ft of
space was delivered across major cities in India . The report points out that the
poor demand from retailers forced developers to defer the expected mall
supply of around nine million sq ft.
Of the proposed 44 malls at the beginning of the first quarter (January-March ),
about 18 were delivered by the year-end. The overall vacancy rate for the
major cities as of December, 2009, was 17 per cent, compared with a 16.7 per
cent vacancy rate in December, 2008. Mumbai had the largest share of mall
supply, in 2009, at 1.8 million sq ft, followed by Hyderabad (1.1 million sq ft)
and the National Capital Region (NCR) (0.9 million sq ft). Bangalore saw the
highest mall supply deferment, with 80 per cent less mall supply than what was
expected. This slowdown in mall construction reflected a negative growth
indicator , for the commercial real estate segment.
However, the projection for the year 2010 and ahead, suggests that the worst
for commercial real estate could be over. According to a report by the DTZ, a
real estate services group which undertook a study to examine how this
recovery will come about and analyse what this means for the future, the
recovery appears visible and inevitable . The research report, called 'The
Second Coming' , says that major office markets in India will revive by Q2,
2010, with increased interest from tenants and a downward correction in
rentals taking place.
This projected indication of recovery has given commercial realtors in India a
much-needed relief, after having weathered a liquidity crunch, slackening
demand , piling inventory and falling rentals, for over a year. Many of them
believe that the pace and scale of market recovery will be led by the tier-I cities
of Delhi-NCR , Mumbai and Bengaluru . Tier-II cities, such as Kolkata and

August 2010 27
 Indian Real Estate
Sector View
Chennai, will see a gradual recovery in the later part of 2010, while the Pune
market is unlikely to see any major changes.
As per the data released by DTZ, of the 84 million sq ft of supply scheduled for
completion across these six key Indian cities of Delhi-NCR , Mumbai,
Bengaluru , Kolkata, Chennai and Pune, only 66 million sq ft will become
available, in the next five quarters. This moderation in supply of approximately
18 million sq ft, is expected to ease the downward rental pressure in major
markets. After correcting between 25 to 40 per cent, across all markets over
the last year, rentals are now getting support at the development cost level, in
some markets.
This market projection brings to the fore the question as to whether 2010 would
be an ideal year to invest in commercial real estate. Brokers assert that there
has been an increase in investors looking for such opportunities, since the
prices are now near the lowest levels. Across India, there has been about 4.6
million sq ft of pre-commitments for space due to be absorbed over the next
two years. Of this, Bengaluru alone accounts for 2.7 million sq ft. This indicates
the revival of the IT/ITes segment, which is the mainstay in Bengaluru. IT
companies are starting to get new contracts, thereby pushing them to commit
to new real estate costs.
Pankaj Jain, executive director of Realistic Realtors, admits that the forecast
looks bright for the commercial segment. However, he also cautions, "It
depends on the profile of the buyer, time horizon and segment of the
commercial property. I would say that for the corporate buyers, who are end
users and have a time horizon of 10-20 years, this is the right time to buy.
Investors , who have a medium-toshort-term outlook, should buy now, only in
the prime locations of metros and suburbs, where prices are falling. For
commercial properties far away from the suburbs, I think they should wait for
another quarter."
Sanjay Kackar, COO of AEZ Group asserts that commercial realty has an edge
over affordable housing, in terms of delivery . "While there is a lot of noise
about affordable housing, an investor has no clue as to how it will shape up.
For instance, the volume of residential spaces that should have been ready for
delivery , across the first quarter of 2010, are still largely under construction or
on paper.
On the contrary, in the commercial segment , you already have available stock
and additional stock will be added to the market, in 2010," he elaborates.
However, in a year of consolidation and low risk, commercial properties will
have to re-brand and re-position themselves, to meet the challenges of 2010.

August 2010 28
 Indian Real Estate
Sector View

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