Economy@glance July 2009

RESEARCH

JULY 2009

ECONOMY @ GLANCE Knight Frank Economic Outlook

The JNNURM, which focuses on rebuilding

In a move that will benefit individuals with an

urban infrastructure in select cities, received

annual income above Rs.1 Mn.,

While the global economy continues in

an increase in funding to the tune of 87% as

the government abolished the surcharge of

recession mode, the Indian economy grew at

compared to the previous fiscal year's

10% on personal income tax. Fringe benefit

6.7% in 2008-09. Although this growth is

allocation. Similarly, allocation to the NHDP

tax, which is levied on corporates, and

lower in comparison to the average growth of

has been increased by 23% from the 2008-09

commodity transaction tax, which is levied on

8.9% recorded in the previous 5 years, it is

allocation.

the futures trading of commodities, have also

still amongst the highest GDP growth rates recorded around the world during this period.

been abolished. However, the government Infrastructure projects around the country have been plagued by an inconsistent stream

India GDP Growth

of funds. These projects, which take an

12

average of about 10-15 years to complete and

10

become operational, require loans with Percent

8

longer terms. Liabilities on the books of banks are typically of shorter durations as

6

deposits received are of an average tenure of 4

1-4 years. Lending to an infrastructure project blocks capital for a longer period, and hence

2

creates an asset liability mismatch for banks, 2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

0

Source: Government of India

infrastructure projects. To combat this problem, the government has earmarked funds with India Infrastructure Finance Company Limited (IIFCL) to refinance 60% of

announced early this month focused on

commercial bank loans for PPP projects in

maintaining growth in spite of the rising

critical sectors over the next 15-18 months.

concern. In order to instigate GDP growth levels of over 9%, the government has initiated measures like providing tax breaks and higher monetary allocation to social sector schemes with a rural focus. These initiatives are aimed at augmenting domestic consumption.

consolidation that would abide by the Fiscal Responsibility and Budget Management (FRBM) Act. A miniscule Rs.11.2 Bn. disinvestment programme has been outlined by the budget. Rising government expenditure and inadequate revenue sources are clearly a concern for the equity markets, and the BSE Sensex recorded an intra-day loss of over 870 points, or 6%, as the budget was announced.

rendering them reluctant to lend to mega

The Union Budget for 2009-10 that was

fiscal deficit of 6.8%, which remains a

has failed to design a blueprint for fiscal

The economic survey of India, announced just before the budget, highlights the possibility of 7-7.5% GDP growth in 2009-10, and recommends abolishing cesses, surcharges and transaction taxes and decontrolling petrol and diesel prices. The survey also recommended divestment of public sector undertakings to the tune of Rs.250 Bn.

With higher allocations to schemes like the

annually and the implementation of a uniform

Jawaharlal Nehru National Urban Renewal

goods and services tax from April 1, 2010.

Mission (JNNURM) and the National Highways

Although most of the important

Development Programme (NHDP), the

aforementioned recommendations have been

government signaled its priority commitment

neglected, a few have been implemented

to developing infrastructure around the

through the union budget.

Developers are attempting to raise about Rs.260 Bn. through the issue of shares to qualified institutional buyers and promoters

country.

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.

JULY 2009

ECONOMY @ GLANCE

12 10

government that will determine whether

has overtaken the agriculture sector and now

8

contributes the most to India's income, a

6

large segment of the country's population

4

still depends on agriculture.

2

2 0 -2 -4

CPI

0

This dependence, particularly prevalent in

-2

rural households, highlights the potential adverse impact of a poor monsoon, which

IIP Index

Mining

Mfg

would not only exert pressure on corporates

May-09

Mar-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

Mar-08

Jan-08

-4

by denting rural income, but would also strain the government's finances if relief

Electricity

Source: Government of India

packages such as the farm loan waiver

While the world's developed economies are

scheme unveiled last year are required.

still reeling under the effects of recession, the

The share of rural demand for the production

Indian economy has recently been exuding

of industries like FMCG, consumer goods,

signals of a revival. The Index of Industrial

automobiles and telecom has been on a

Production (IIP), which reflects the pace of

steady rise in the last decade, and hence, a

industrial activity in the country, increased by

poor monsoon would harm the

2.7% in May'09, which represents its best

aforementioned sectors.

May-09

summer months. Although the service sector

Mar-09

10

4

Jan-09

pertaining to production volumes during the

6

Jan-08

12

Percent

parts of the country are raising concerns Index of Industrial Production (IIP)

Percent

8

The relatively subdued monsoons in major

potential benefits accrue where most needed.

Nov-08

sector's output increased by a strong 11.6%.

Sep-08

recorded growth of 2.8%, while the cement

execution of these measures by the

Jul-08

consumption have been announced, it is the

Inflation (Monthly Average) 14

May-08

performance since Sep'08. The core sector

Mar-08

Even though various measures to stimulate

WPI

Source: Government of India

A below par monsoon would also impediment the production of essential items like food grains and vegetables, driving up their prices and hence reducing the real income of households. Since Jun'09, the price of essential commodities has been rising. Per the latest available data, as of May'09, the CPI inflation stood at 8.6%, although WPI inflation, on the back of a higher base effect, remained negative at -1.6% for the week ended June 27, 2009.

Table: Indicative list of fund raising plans of real estate developers Company

Amount (Rs. Bn.)

Likely instrument

Fund raising status

Unitech

16

QIP

Completed in Apr'09

Unitech

28

QIP

Completed in Jun'09

Unitech

12

Share warrants to promoters

Completed in Jun'09

Indiabulls Real estate

27

QIP

Completed in May'09

Sobha Developers

5

QIP

Completed in July'09

HDIL

17

QIP

Completed in July'09

HDIL

6

Share warrants to promoters

Completed in July'09

Parsvanath

25

QIP

Shareholder approval received in Jun'09

Puravankara

8

QIP

Shareholder approval received in Jun'09

Anant Raj Industries

20

QIP

Shareholder approval received in Jun'09

Anant Raj Industries

2

Share warrants to promoters

Shareholder approval received in Jun'09

Omaxe

18

QIP

Shareholder approval received in July'09

Orbit Corp

5

QIP

Shareholder approval received in July'09

Ackruti City

25

QIP

Shareholder approval expected by 20 July'09

Ansal Properties & Infrastructure

15

QIP

Shareholder approval expected by 17 July'09

Ansal Properties & Infrastructure

25

Share warrants to promoters

Shareholder approval expected by 17 July'09

Peninsula Land

8

QIP

Shareholder approval expected in July'09

Total

260

Source: NSE, Knight Frank Research

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.

JULY 2009

ECONOMY @ GLANCE The two fiscal stimulus packages and

Commercial real estate transactions,

reductions in policy rates since Oct'08 have

considered a key indicator of economic

eased the liquidity crunch that was afflicting

activity, appear to be picking up again after

highly leveraged players of India's real estate

the woes that persisted until as recently as

industry.

the early part of this year. Per recently conducted market research, recent

Furthermore, the general elections have improved sentiments and unlocked fresh funding avenues for the industry, which has recently witnessed attempts at fund raising through the issue of shares to qualified institutional buyers and promoters. Currently, major players are attempting to raise about Rs.260 Bn. through the aforementioned means. However, the amount that is actually raised will depend on investor response, and it has been observed that certain players have managed to raise much less than initially proposed amounts. Furthermore, in

transaction data revealed that Chennai and its adjoining areas witnessed more than 1.95 mn.sq.ft. of property deals in the first half of 2009, similar to the quantity of transactions observed in the first half of 2008. Lease rentals both in peripheral areas as well as CBD areas of major cities are showing signs of settling down. Around Guindy, situated in South Chennai, lease transactions were sealed for Rs.45/sq.ft., a figure not too far removed from the rates of Rs.55/sq.ft. observed in this area during the peak of real estate activity.

the event of fund raising through the issue of share warrants, the company receives only

Likewise, in the CBD of Chennai, transactions

25% of the issue size, with the balance

were recently concluded at around

outstanding for another 18 months if the

Rs.60/sq.ft., while peak rates observed in

warrant holder exercises the warrants. In

this area were around Rs.75/sq.ft. a couple of

most of the cases, funds raised will be

years ago. It should be noted that the

utilized for the repayment of loans and the

commercial real estate markets in cities like

execution of ongoing projects. For the most

Mumbai, which witnessed the most

part of 2008-09, funding options for the

aggressive price inflation during the boom,

realty sector have been scarce as banks were

are expected to take slightly longer to

apprehensive to lend, and there was no

recover.

turnaround in sentiments witnessed over the last few months, funding has become more accessible, and this is expected to drive the recovery of India's real estate market.

Real Estate Outlook: Signals of Recovery

demand is also evidenced by the fact that discounts, which were rampant during the

On the housing front, the recent attitude of

year, are no longer prevalent on the same

certain developers is a fair reflection of their

scale. Also, plans for aggressive asset sales

positive sentiments pertaining to demand.

to raise funding are being revised now in light

In fact, as observed recently by Mr. Deepak

of what is perceived by developers as

Parekh, Chairman of HDFC, some developers

improving market conditions. DLF announced

have been taking advantage of stabilizing

towards the end of June that a number of

demand by increasing prices of mid-range

holdings that it had put up for sale earlier in

properties. This has generated considerable

the year, when falling property prices were

concern that if these actions prove too

crippling the market, were no longer for sale.

After the turmoil of the past year, the signs

premature, they could cause a relapse of

are that the Indian real estate sector might

sorts. Unitech has recently marginally

just be embarking on the path to recovery.

increased prices by approximately 2% in its

Symptoms of the malaise, examples being

Gurgaon projects. Lodha Group has upped

declining residential and commercial activity,

prices on certain housing projects by 10-15%,

appear to be subsiding, and a raft of

and a Lodha spokesman recently confirmed

measures and proposed changes by the

that they have raised prices of luxury projects

public sector also bode well for the real

launched in March. Bangalore-based

estate market in India. Although it is still too

developer Brigade Enterprises, which slashed

early to silence the cynics, it would not be

prices by 15% in April, has now increased

unreasonable to suggest that the worst has

rates by 3 to 5% and said that it plans to

past.

continue doing so at regular intervals.

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

The perceived improvement in residential

latter part of last year and early part of this

investor appetite for equity issues of major players. However, with the gradual

cities like Mumbai, which witnessed the most aggressive price inflation during the boom, are expected to take slightly longer to recover.

In addition to the immediate signs of improvement being witnessed, the signs are that in the longer term, India's realty sector will benefit from concerted public and private sector initiatives.

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.

JULY 2009

ECONOMY @ GLANCE The following tables depict the top 5 office

only 10 acres. As of now, FDI is allowed in

However, overall aggregate demand is still

micro markets in NCR and Bengaluru in terms

realty projects only if the minimum area

well below levels witnessed during the boom,

of rental declines observed between Apr'09

covered is 25 acres. Such a move will help

and in cities like Mumbai and NCR, where the

and Jun'09. The relatively slight magnitude of

realty projects in metros like Mumbai, Delhi,

markets were ravaged by speculation, the

these declines as compared to declines

Bangalore, Chennai and Hyderabad to attract

recovery will be a longer and more painful

observed a few months back is reflective of

FDI. Realty players feel that it is not possible

process.

the fact that office market rentals around the

to find 25 acres of land in these cities to

country are stabilizing.

develop projects in compliance with FDI

NCR Micro Market

Apr'09-Jun'09 Rental Change

Nehru Place

-7%

Connaught Place

-6%

regulations laid down in Press Note 2 of 2005. The DIPP has also recommended that the minimum capitalisation norms specified in Press Note 2 be waived in the case of hospitality and tourism projects. This waiver

Noida / Okhla Industrial Area / Mohan Cooperative Area

-3%

Gurgaon

-2%

hotel and tourism businesses. Press Note 5

-1%

specifies that minimum capitalisation should

would be applicable in case 50% of the built-up area in a project is devoted to the

Bhikaji Cama Place

The following tables depict the top 5 residential micro markets in NCR and Bengaluru in terms of price decline observed between Apr'09 and Jun'09. The relatively slight magnitude of these declines as compared to declines observed a few months ago is reflective of the fact that residential prices around the country are stabilizing. NCR Micro Market

Apr'09-Jun'09 Price Change

be USD 5 mn. for permitting FDI in realty

Express Highway - Noida

-12%

projects that involve an Indian partner.

Old Ghaziabad

-9%

Apr'09-Jun'09 Rental Change

In case the project is implemented by a

Noida

-7%

fully owned subsidiary of an overseas firm,

Outer Ring Road

-11%

the minimum capitalisation specified is

-6%

Koramangala

-10%

USD 10 mn. Although these proposed

Nehar Par- Faridabad / NH- 24 - Ghaziabad / Indrapuram - Ghaziabad

Banerghatta Road

-5%

changes are promising and would be hugely

NH - 2 Faridabad

-5%

Electronic City

-4%

beneficial if executed, it is critical that the FDI

Indira Nagger

-2%

lock in requirement of 3 years is waived, as

Source: Knight Frank Research

Bengaluru Micro Market

Source: Knight Frank Research

Recently, IREO, the first and the largest global investment fund dedicated to the Indian real

foreign investors would be less apprehensive about pumping money into a project if they had an earlier exit route.

Source: Knight Frank Research

Bengaluru Micro Market

Apr'09-Jun'09 Price Change

Malleshwaram

-8%

Banswadi

-6%

estate sector, announced its foray into real

The recently presented budget, although it

Basavangudi

-5%

estate development in India with a portfolio

didn't directly boost the realty sector, is

Rajaji Nagar

-4%

of 13 projects located in prime locations

expected to indirectly boost real estate

around the country, examples being NCR,

Whitefield

-3%

development through its emphasis on

Punjab, Tamil Nadu and Maharashtra. IREO's

infrastructure development. The higher

VC and MD Mr. Lalit Goyal recently

allocation to the National Highways Authority

In Bengaluru, certain residential micro

announced the commencement of

of India (NHAI) will ensure improved and

markets have recently been witnessing price

construction and leasing of 5 mn.sq.ft. of IT

accelerated connectivity, which in turn would

appreciation. This is reflective of the fact that

SEZ space and 3 mn.sq.ft. of housing.

raise the value of real estate along routes

certain developers are banking on improved

Projects launched will entail the development

covered and open up new areas for

demand sentiments and are raising prices.

of more than 8 mn.sq.ft. of housing in the

development. A larger allocation for the

The following table depicts the top 5

coming 12 months. The total expenditure by

Jawaharlal Nehru National Urban Renewal

residential micro markets in Bengaluru in

IREO on real estate and infrastructure is

Mission (JNNURM) will help improve road and

terms of price appreciation observed between

expected to be approximately USD 500 mn.

rail connectivity in urban and suburban

between Apr'09 and Jun'09.

areas, which in turn would boost mass

Bengaluru Micro Market

There has for a while been considerable talk of easing FDI regulations to facilitate foreign investment in Indian real estate. Recently, the

housing schemes on the fringes of metros. As is evident above, although real estate

Department of Industrial Policy & Promotion

activity is likely to remain relatively dormant

(DIPP), in a note drafted for the Cabinet

for a while yet as major players consolidate

Committee on Economic Affairs (CCEA),

and recover from the shocks of the past year,

proposed that FDI should be allowed to flow

the overall picture looks a lot rosier than it

into realty projects even if the area covered is

did barely months ago.

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

Source: Knight Frank Research

Apr'09-Jun'09 Price Change

M.G. Road

21%

Bellary road

17%

Indira nagar

7%

Koramangla

5%

J.P. Nagar

1%

Source: Knight Frank Research

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.