Economy@glance Aug 2009

RESEARCH

August 2009

ECONOMY @ GLANCE Knight Frank Economic Outlook

Despite the general optimism surrounding

The significance of monsoons can be gauged

the Indian economy, exports remain a

by the fact that taking cues from sub-normal

The indicators of economic revival are

concern due to weak demand from developed

monsoons, several economic agencies have

gaining strength as various fiscal and

countries. In Jun'09, exports declined by 28%

lowered their growth estimates for FY 10 by

monetary measures are slowly but surely

compared to Jun'08 levels. This concern is

around one percentage point. While the

yielding a revival in the Indian economy.

alleviated by the fact that in recent times, the

contribution of agriculture to the country's

Whether or not the recovery continues once

rate of decline of exports has been coming

GDP has come down drastically from about

the benefits offered under the stimulus

down. Also, unlike Chinese exports, which

30% in early 1990's to about 17% in recent

packages are reversed remains to be seen.

comprise a large share of China's GDP,

years, the lack of irrigation facilities for a

India's exports contribute just about 15% of

major chunk of crop land poses a threat to

GDP, and domestic consumption is the major

agriculture output. This is due to the fact that

driver of economic growth.

a major chunk of crop land, about 60%, does

14 12

36 meteorological sub-divisions recorded a

10

sub-normal monsoon. These 19 sub-divisions

4

Percent

CPI

recorded an increase of 7.8% in Jun'09, which represents its best performance

Jul-09

The Index of Industrial Production (IIP)

-2 -4

May-09

IIP

20

15

18

12

16

9

14

6

12

3

10

0

0

Mar-09

Electricity

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08 Mfg

Source: Government of India

Cement Production & Consumption

2

Jan-09

Mining

Jun-08

Apr-08

Feb-08

-2

dismal agricultural production is expected.

4

Mar-08

0

cover about 52% of crop land, and thus,

6

Nov-08

2

8

Sep-08

6

period June-July'09, 19 of the

12

Jul-08

8

14

May-08

Percent

not have adequate irrigation facilities. For the

Inflation (Monthly Average)

10

WPI

Percent

16

Million Tonnes

Index of Industrial Production (IIP)

Source: Government of India

monsoon in some central and northern states

on infrastructure projects, which is generally

50, it indicates expansion, whereas when

that has adversely impacted agricultural

discontinued during the monsoon season, is

it's below 50, it indicates contraction. An

production, thus exerting upward pressure on

continuing unaffected this year. Hence,

indication of the upswing of the Indian

prices of essential commodities. High

strong cement consumption has been

economy in recent times is the fact that in

inflation and price instability are expected to

witnessed during this period.

Dec'08, the PMI index hit a low of 44.37.

discourage the central bank from reducing

Jun-09

been continuing construction activity. Work

previous month. When this index is above

Apr-09

The flip side of the delayed monsoons has

9.3% in Jun'09. This is due to the poor

May-09

inflation increased from 8.6% in May'09 to

at 55.30 in Jul'09 as compared to the

Cosumption

Mar-09

Managers' Index (PMI) remained steady

Production

Jan-09

Source: EIS,CMIE

Feb-09

negative at -1.74% in week 1 of Aug'09, CPI

Dec-08

prove costly. Although WPI inflation is still

increase in exports, the Purchasing

Oct-08

demand, sub-normal monsoons could yet

Amidst robust local demand and a slight

Nov-08

manufacturing recorded a rise of 7%.

Sep-08

liquidity have provided impetus for domestic

Jul-08

core sector of mining grew by 15%, while

Aug-08

While reduced interest rates and increased Jun-08

since Feb'08. During the same period, the

Production Growth (YoY %) (RHS)

policy rates further.

India Research Samantak Das National Head - Research +91 (022) 2267 0876 [email protected]

KnightFrank.com This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is allowed with proper reference to Knight Frank Research.

August 2009

ECONOMY @ GLANCE To match this strong demand, cement

Banks and housing finance institutions have

production witnessed a growth of 12% in

reduced interest rates on home loans. HDFC,

May'09 and 13% in Jun'09 as compared to the

the largest mortgage lender, reduced rates by

same periods last year. Consequently,

around 50 basis points in Aug'09. Home loan

Affordable Housing: A Public Private Partnership Solution

cement prices, which generally dip during

interest rates on a typical Rs.2 mn. loan with

Knight Frank's recently released report on

monsoons, have stood firm this season.

a 20 year tenure now hover around 9%. While

affordable housing highlighted the immense

certain banks are offering an 8% interest rate,

potential for affordable housing development

this rate would be fixed only for the first one

across India. A potential market size of

to two years. Despite lower rates though,

Rs.3,300 billion constituting potential

HDFC's housing credit data reflects lower

development of approximately 2 million

credit growth in Q4 FY09 and Q1 FY10

housing units holds great promise not only

compared to the corresponding quarters last

for India's residential market, but also for the

year. The growth in housing loan

economy as a whole. However, as highlighted

disbursement in Q1 FY10 stood at 21% as

in the report, development of such magnitude

compared to a 28% growth in the

requires a concerted and coordinated

corresponding quarter last year.

initiative by both developers and the public

50

260

40

Rs./50 kg. bag

270

30

250

240

20

230

10

Cement (LHS)

Jul-09

Apr-09

Jan-09

Oct-08

Apr-08

Oct-07

Jul-08

0

Jan-08

220

Rs./kg.

Steel & Cement Prices

To support middle income group housing, the

Steel (RHS)

maximum amount for housing loans to be

Source: EIS,CMIE

eligible for the 1% interest rate subsidy has

sector. The merits of a Public Private Partnership (PPP) have been best demonstrated by the PPP housing model in West Bengal, the success of which has

In a bid to reform income tax laws, the

been increased from Rs.0.1 mn. to Rs.1 mn.,

government has proposed a new direct tax

wherein the value of the house should not

code that will be applicable in 2011 and will

exceed Rs.2 mn. However, this benefit will be

replace the existing Income Tax Act. The

The PPP model was formulated in the 1990s

provided only for the first year of the loan.

objective behind this is to revamp existing

with the aim of decongesting the city's

The government has allocated an amount of

tax laws and reduce litigations resulting from

housing market. As with similar initiatives in

Rs.10 bn. for this scheme.

other parts of West Bengal, the PPP model in

equivocal interpretations of these laws. The

transformed Kolkata's residential market.

Kolkata was founded on a partnership

most important provisions of this new tax

In order to boost developers' inclination

code are a reduction in corporate taxes from

towards affordable housing projects, the

30% to 25% and restructuring of taxes on

benefit provided to developers of such

individual income. For instance, in case of

projects through exemption from income tax

taxes on individual income for men, 10% tax

u/s 80 IB (10) has been extended for an

will be applicable for incomes ranging from

additional year. In order for developers to

Rs.0.16-1 mn., 20% tax will be applicable for

benefit from this scheme, unit sizes should

incomes ranging from Rs.1-2.5 mn. and 30%

not exceed 1000 sq.ft. in Mumbai and Delhi

tax will be applicable for incomes above

and 1500 sq.ft. in other cities. With the

Rs.2.5 mn. However, several allowances that

extension of the eligibility period for the

Previously, the standard model entailed the

are currently not taxed will be included in the

80 IB (10) scheme, projects approved during

government supplying land and facilitating

new income limits.

FY'08 and completed by Mar'12 will benefit

approvals for stipulated projects. In the case

from tax exemption.

of WBHB, the joint sector model has now

HDFC Home Loan 180

50

150

40

120

30

90

20

60

10

30

0

attractive on paper, are in fact a touch narrow in scope. Just as the potential benefits of the Percent

Rs. Billion

The aforementioned schemes, while

interest rate subsidy are not expected to significantly boost demand, the potential benefits of the extension of the period for income tax exemption is perceived to be too short to reap the desired benefits.

Approvals

Disbursals

Approvals Growth (%)

Disbursals Growth (%)

Q1 FY-10

Q4 FY-09

Q3 FY-09

Q2 FY-09

Q1 FY-09

Q3 FY-08

Q4 FY-08

Q2 FY-08

Q1 FY-08

-10

Q4 FY-07

0

Larger-scale initiatives are required in order to provide meaningful impetus to the demand

between private developers and the concerned government authorities, namely the Kolkata Metropolitan Development Authority (KMDA), West Bengal Housing Board (WBHB) and Housing Infrastructure Development Corporation (HIDCO). It is worth noting that these authorities adopt different joint venture models.

been modified to become more of an “assisted venture” model, wherein the government holds 11 per cent stake in the partnership and acts only as a facilitator, while developers now need to purchase land directly. In HIDCO's case, bearing in mind the importance of affordable housing, it is mandatory that 50 per cent of units constructed cater to the low and middleincome groups.

and supply sides.

Source: HDFC

India Research Samantak Das National Head - Research +91 (022) 2267 0876 [email protected]

KnightFrank.com This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is allowed with proper reference to Knight Frank Research.

August 2009

ECONOMY @ GLANCE The pricing of these units is decided in

94 acres located in Durgapur in the distant

intention to enter the affordable housing

consultation with the government. LIG Flats

suburbs, was developed in partnership with

segment and may enter into a PPP agreement

are being provided at subsidised rates and

the Asansol Durgapur Development Authority.

with the Maharashtra Government. Other

MIG flats on a no profit-no loss or marginal

Another example of a successful PPP

developers would do well to explore such

profit basis. For the HIG flats, builders have

initiative is the HIDCO township in Rajarhat,

possibilities in order to provide real impetus

been given freedom to fix prices. It should be

developed in a JV with SP Real Estate. This

to the affordable housing initiative.

noted that HIDCO primarily focuses on the

township comprises 20,000 housing units,

development of New Town, Rajarhat.

out of which 12,000 units are LIG flats and

Residential Market Synopsis

8,000 units are MIG flats. These units are

Comparing the Jul'09 and Jun'09 residential

allocated by means of a draw of lots, and only

rates in Mumbai and NCR reveals an

accept application up to a certain income

interesting trend. As highlighted in the

level. An individual with a monthly income of

previous month's Economy @ Glance edition,

less than Rs.10,000 per month can apply for

residential rates in select locations across

an LIG flat, while for MIG flats the income

India are appreciating slightly. This

should be less than Rs. 18,000 per month.

phenomenon is evident in Mumbai, where

Meanwhile, another development authority, KMDA has a defined model of PPP, wherein it auctions land parcels to the highest bidder. The profit that is generated by a particular project is divided evenly between KMDA and the respective developer. In this model, there is no set policy pertaining to a required ratio for EWS, LIG and MIG houses. However, most

Knight Frank's affordable housing report

projects under this model exhibit a 30-40%

highlights the importance of infrastructure

mix of LIG and EWS categories.

development to supplement affordable housing markets that tend to crop up in

The success of these models is based on their successful promotion of the affordable housing initiative. While affordable housing is largely unprofitable for private developers, they have taken to the PPP model for two reasons. Firstly, developers can obtain high margins due the unrestricted pricing of HIG units built on low cost land. Secondly, these models allows for easier land acquisition as the government facilitates land sanctions and conversions. House buyers have also benefitted hugely from the PPP initiative. For example, an HIG flat at Rajarhat costs Rs. 3,000 per sq.ft., whereas one in Ballygunge would cost anywhere between Rs.8,000 and Rs.12,000 per sq.ft. Similarly, the prices of LIG and MIG units are fixed by the state housing board at around Rs.0.3 and

remote suburbs. Despite the various successful aspects of the West Bengal PPP model, the provision of supporting infrastructure has proved a stumbling block. For example, of the proposed 0.15 mn. units to be developed in Rajarhat, nearly 5,000 flats have been delivered. However, the minimal so far, the primary reason for this being the inadequate provision of basic infrastructure such as internal roads, electricity, sewage, drinking water, and transport. Plans are underway to connect the

Bengal Ambuja Housing Development Ltd., a joint venture between Gujarat Ambuja Cements Ltd (49.99 per cent) and the West Bengal Housing Board (49.99 per cent). Bengal Ambuja has completed several large and medium sized housing projects that constitute homes in the LIG, MIG and HIG segments. Bengal Ambuja has also developed projects in partnership with other agencies apart from the state housing board,. For example, Urvashi, a project spread over

India Research Samantak Das National Head - Research +91 (022) 2267 0876 [email protected]

primarily due to developer optimism, which at this early stage of economic recovery is a touch premature. By contrast, only 2 micro markets in the NCR exhibited price increases, that too very marginal, during Jul'09. This reflects the fact that developers in the NCR are less bullish about demand sentiments than are certain developers in Mumbai. Mumbai Micro Market

Price Change Jun'09-Jul'09

Worli ( Grade B) / Goregaon to Borivili / Vashi

11%

South Mumbai (Grade B) / Mulund

10%

Rajarhat area with the main city through a

South Mumbai (Grade A)

5%

light rail transit and an extension of the

Worli (Grade A) / Central Mumbai (Parel, Sewri, Byculla)

3%

Bhandup

2%

proposed east-west metro corridor. However, the provision of basic infrastructure development could take 3-4 years.

Source: Knight Frank Research

The overall success of the West Bengal PPP private institutions in the PPP model is

increases during Jul'09. This trend is

occupancy in these projects has been

Rs.0.6 mn. respectively. An example of the successful engagement of

key micro markets have witnessed price

NCR Micro Market

Price Change Jun'09-Jul'09

model should serve as a good example as to the potential benefits of PPP models in other

1%

alleviate developers' concerns pertaining to

NH- 24 - Ghaziabad / East Delhi (Mayur Vihar, Preet Vihar, IP extension)

affordable housing, namely low profit

Anand Niketan

-1%

margins and land acquisition. The indications

Old Ghaziabad

-2%

are that developers across the country are

Vaishali / Vasundra- Ghaziabad / Nehar Par- Faridabad

-3%

Noida

-4%

states across India. The primary benefit of such a model is that if well thought out, it can

realizing the benefits of such a model, and are now exploring possibilities given the recently increased focus on affordable housing. For example, Hiranandani

Source: Knight Frank Research

Constructions recently announced its

KnightFrank.com This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is allowed with proper reference to Knight Frank Research.