Economy@glance May'09

RESEARCH

May 2009

ECONOMY @ GLANCE Knight Frank Economic Outlook

This figure would constitute losses of

The root cause of this recent show of strength

USD 185.5 billion from mortgages,

by domestic equity markets was the inflow of

The world economy, even though in the

USD 82.4 billion from credit card loans and

money from Foreign Institutional Investors

process of healing, is still far from being

USD 53 billion from commercial real estate

(FII). While FIIs remained net sellers of

completely recovered. Key indicators of

loans, all of which represent loans presently

Rs.62 Bn. during the initial three months of

economic health, namely output, exports,

on banks' books that are now most

2009, they registered a net purchase of

employment and business confidence,

vulnerable to default. If the ongoing

Rs.65 Bn. in April alone. This is also the

improved in March and April, but still remain

recession were to worsen, 10 of the 19 banks

reason behind the strength of the Rupee

worryingly low. While domestic demand is

tested would need a capital infusion of about

during this period. FIIs have continued

sufficient to stave off fears of recession, the

USD 75 Bn. to withstand ensuing losses.

purchasing Indian equities throughout this

significance of the impact of the global

month, and have recorded a net purchase of In India, while the financial FY'09 witnessed

For instance, the USA is the largest consumer

bleak economic conditions, there is a

of domestic exports, and thus, subdued

growing belief that the worst has passed.

levels of demand in the USA will adversely

However, although certain indicators have

impact employment and the exports sector in

signaled improvement in economic activity,

India.

whether or not this translates to a revival is

Rs.50 Bn. till May 12, 2009. A strong positive correlation has been observed between FII purchase and equity market performance, and the same, along with FII investment in debt securities, is highlighted in the charts below.

debatable. This is so because these apparent The global economic scenario looks anything

FII Net Investment in Equity Securities 25

100

signs of improvement need to be considered

20

but promising. During Q1'09, the US GDP

in the context of the low base effect. In

recorded a decline of 6.1% annually. This

Mar'09, the index of six core infrastructure

represents the worst decline in 50 years, and

industries witnessed a growth of 2.9%, which

there is scant clarity as to what the

represents the highest growth in this index

immediate future holds. Although

since Sep'08. Even though the real estate

-100

unemployment claims in the US were at a

industry remained muted, cement grew at the

-150

-20

calendar year low during Apr'09, the

highest rate of 10.1% on account of the

-200

-30

50

15 10

Rs. Billion

0

5 0

-50

-5 -10 -15

showed some strength during the previous

likely to adversely impact the Indian IT/ITES

month.

0

these 19 banks during 2009 and 2010 could

38% and 26% respectively.

* May'09 data as of May 12th, 2009.

May'09*

-80

developers DLF and Unitech increased by

Mar'09

financial situation were to worsen, losses at

Jan'09

-60

the same period, the share prices of major

Nov'08

the Realty index increased by 36%. During

banks. The tests revealed that if the current

Sep'08

-40

Jul'08

Nifty increased by 17% and 15% respectively,

conducted a stress test on its 19 largest

Jan'08

by the Realty Index. While the Sensex and

assess the state of its financial system,

May'08

-20

Mar'08

Rs. Billion

20

The Indian equity markets posted gains in

Recently, the US government, in order to

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

Sep'08

FII Net Investment in Debt Securities

40

Apr'09, with the major growth being recorded

be as high as USD 600 billion.

Sensex monthly returns (RHS)

60

sector and hamper commercial real estate development in major cities.

Mar'09

has been consistently declining recently,

May'09*

Source: SEBI, Prowess

Jan'09

last year. The INR/USD exchange rate, which

restricting business process outsourcing to

Jul'08

administration has voiced its intention of

FII net investment (LHS) * May'09 data as of May 12th, 2009.

Mar'08

of 5.7% in Mar'09 relative to the same period

May'08

automobile industry witnessed sales growth

opportunities in the US, the Obama

Jan'08

demand from infrastructure projects. The

25 year high. In order to create employment

Nov'08

-25

unemployment rate of 8.9% represents a

countries like India. This, if implemented, is

Percent

economy on India cannot be underestimated.

Source: SEBI

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.

May 2009

ECONOMY @ GLANCE Despite the encouraging signs emanating

Afflicted players within the real estate

launched projects in this region. Capital

from the equity markets, all is not rosy. Indian

industry are undertaking measures to ease

values continued to decline over Q1'09 as

exports declined for the seventh consecutive

their strife. Certain developers have stalled or

buyers and sellers continued to re-align their

month, falling by 33% to USD 10.7 Bn. in

offloaded stakes in ongoing projects in order

sentiments to match prevailing market

Apr'09 relative to the same period last year.

to minimize the impact of the financial crisis

conditions. However, with the exception of

Similarly, industrial activity, as reflected by

and poor demand conditions. DLF has

Greater Kailash II and New Friends Colony,

the Index of Industrial Production (IIP),

applied for the de-notification of its four IT

where capital rates declined 16% from Q4'08

contracted by 2.3% in Mar'09. The IIP grew by

SEZs planned in Sonepat, Gandhinagar,

rates, the magnitude of price declines

a mere 2.4% in FY'09 compared to 8.5%

Bhubaneshwar and Kolkata. Other

witnessed across most NCR micro-markets

growth in the previous year. Corporate results

developers are redefining their offerings

during Q1'09 was minimal. Even during

for the last quarter of FY'09 were below par.

based on current market sentiments.

Apr'09, relative to Mar'09, the only notable

This was best reflected by the realty sector,

A number of affordable housing projects

declines in rates were observed in Defence

where amongst the BSE Realty Index

exhibiting smaller ticket sizes have been

Colony, where prices declined by 5%, and

companies that declared results till

announced, and will cater to the rising middle

Anand Niketan, Vasant Kunj and pockets of

May 11, 2009, while standalone income

income segment. HDFC's home loan

East Delhi, where rates declined by 4%.

declined by 33%, net profit declined by 41%.

approvals and disbursements data reflects a

This indicates that consumers who were

During Apr'09, the equity markets, specifically the Realty Index, recorded gains on the back of the net buying of equities by FIIs.

decent last quarter of FY'09 for the residential

previously sitting on the fence anticipating

property market. Loan disbursals for this

further price declines are now speculating

quarter totaled Rs.124 Bn., while approvals

that prices have bottomed out. However,

stood at Rs.153 Bn. The general election

until this sentiment envelopes the majority

results are around the corner, and the

of buyers, prices across NCR's residential

government that takes charge is expected to

market will continue to decline marginally.

provide several pointers as to the direction

The following table depicts the top 5

the Indian economy will take over the coming

residential micro-markets in the NCR in terms

months.

of price decline from Q4'08 to Apr'09. HDFC Home Loan Approvals and Disbursals

The RBI, continuing with its efforts to ease

180

credit flow, further reduced the repo and

160

reverse repo rates by 25 bps each in Apr'09.

140

reduced policy rates, and until now has reduced the repo and reverse repo rates by 425 bps and 275 bps respectively. Despite

120

Rs. Billion

Since Sep'08, the apex bank has consistently

100

7%

Source: Knight Frank Research

Mumbai

Approvals

Q4 FY'09

Q3 FY'09

Q2 FY'09

Q1 FY'09

Q3 FY'08

Q4 FY'08

Q2 FY'08

Q1 FY'08

Q4 FY'07

indicating that economic activity could

Disbursals

Source: HDFC

Residential Market Overview

30

Developers in the NCR are continuing to reduce prices and apartment sizes in order to increase affordability. Recently launched projects such as Uniworld Garden- II, located in Gurgaon and developed by Unitech, and

15

Centrum Park, also located in Gurgaon and Apr'09

Feb'09

Dec'08

Oct'08

Aug'08

Jun'08

10

Source: RBI

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

rate schemes have stimulated demand and somewhat stabilized the Mumbai residential declining, are not plummeting at the rates witnessed during the latter half of 2008. During Q1'09, particularly sharp declines

NCR

20

Drastic price reductions and lower home loan

market. Capital values, although still

35

25

9% 6%

annually in Apr'08 to 18% annually in Apr'09,

40

Greater Noida Vasant Kunj

0

Banks' Non Food Credit Outstanding Growth (Y-o-Y)

17% 16%

60

credit growth has declined from 30%

remain subdued over the coming months.

Greater Kailash I & II New Friends Colony Defence Colony

20

credit by banks continues to fall. Non-food

Dec'08-Apr'09 Price Decline (%)

80

40

this, the growth in outstanding non-food

Percent

NCR Micro-Market

developed by Indiabulls, were offered at markedly lower rates compared to previously

were observed in rates in suburban micro-markets like Bandra, Goregaon and Borivili. This was primarily due to continuing low demand and a lack of advanced commitments for under construction projects. Projects are still being postponed as the overriding priority of developers is shifting of inventory and the completion of projects in progress.

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.

May 2009

ECONOMY @ GLANCE Going forward, capital rates, although

Office Sector Report Overview

4.03 mn.sq.ft. of fresh space, which amounts

decline until they become more realistically

At the end of April, Knight Frank research

was slated to enter the market during this

aligned with the prevailing demand scenario.

released its Q1'09 office sector report. The

period.

The following table depicts the top 5

following is a city-wise depiction of the

residential micro-markets in Mumbai in terms

report's highlights.

relatively more stable now, will continue to

of price decline from Q4'08 to Apr'09. Mumbai Micro-Market

Dec'08-Apr'09 Price Decline (%)

is concentrated in suburban/peripheral micro-markets like Rajarhat, which could

including SEZs, to be developed in the

consequently witness further rental declines.

7 major cities of the country from 2009 to

31%

2011, which is expected to far exceed the

Thane

17%

incremental demand for office space of about

Bandra (W)

16%

122 mn.sq.ft.

13%

Worli (Grade A)

11%

Source: Knight Frank Research

• Around 97% of upcoming supply in Kolkata

• Approximately 183 mn.sq.ft of office space,

Goregaon to Borivili

Central Mumbai (Parel, Sewri, Byculla etc)

to barely 30% of the estimated supply that

Bengaluru • During 2008, Bengaluru witnessed the infusion of 6.55 mn.sq.ft. of Grade A, non-SEZ office space, of which around 4 mn.sq.ft. was

Mumbai

absorbed.

• In Mumbai, while around 26 mn.sq.ft. of office space is expected to come up in the

• Rentals in Bengaluru's CBD have declined

Bengaluru

next 3 years, the demand for such space is

25% from Mar'08 to Mar'09. Demand and

End user and investor demand for residential

estimated to be only 18 mn.sq.ft.

rentals in the city's office market are

property in Bengaluru remains downbeat in the face of continuing economic woes. Despite this, capital rates across the city remained relatively stable as developers proved resistant to the need to lower rates. This is due to the fact that in the Bengaluru

expected to recover as Bengaluru shifts from • In Mumbai, only 52% of the 11.6 mn.sq.ft.

being IT/ITES intensive to encompassing

that was planned to come up in 2008 actually

other sectors.

entered the market. Further, of the 6 mn.sq.ft. fresh supply, only 2.3 mn.sq.ft. was absorbed.

Hyderabad • Only 3.8 mn.sq.ft. of the total 6.6 mn.sq.ft.

residential market, as opposed to the

• Rentals in the Lower Parel micro-market are

to hit Hyderabad's office market in 2008 was

Mumbai market, speculative investment has

estimated to correct by 60% from 2007-08

absorbed.

not been too prevalent, and demand and

peak levels, followed by Malad- Mindspace

supply have remained more or less on par.

and Powai rentals, which will correct by up to

During Apr'09, relative to Mar'09, the only

58% and 57% respectively from peak levels.

notable price declines occurred in Bellary Road, where prices declined by 9%, and Banswadi, Rajaji Nagar and Whitefield, where rates declined by 4%. Going forward, although significant price declines are not expected, there will be a period of consolidation by developers, who are focused on the completion and sale of

• Rental values in CBD and off-CBD locations of Hyderabad have dropped from Rs.70/sq.ft. in Q1'08 to between Rs.50-60/sq.ft. in Q1'09.

Pune

• Hyderabad's office market diversifying to

• From 2009-2011, Pune will witness fresh

include the financial, biotechnology,

supply of 28 mn.sq.ft., higher than other

hardware, pharmaceutical and tourism

prominent cities like Mumbai, Chennai,

sectors.

Hyderabad and Kolkata.

Chennai NCR

• In Chennai's office market, approximately

phase, capital rates can be expected to

• NCR, with a supply of 41 mn.sq.ft., will be

4.1 mn.sq.ft. of space was absorbed over the

decline marginally over the coming months.

the largest contributor to the Pan-India

past year, a figure that represents a marked

The following table depicts the top 5

supply from 2009 to 2011.

dip from the expected absorption of

ongoing and completed projects. During this

residential micro-markets in Bengaluru in terms of price decline from Q4'08 to Apr'09.

9 mn.sq.ft. • In NCR, the most prominent rental declines are estimated in Gurgaon and Noida, where

• Close to 47 mn.sq.ft. of SEZ space has been

Bengaluru Micro-Market Dec'08-Apr'09 Price Decline (%)

rentals, by the time they bottom out, will have

planned in Chennai, and if this planning

corrected by 63% and 62% respectively from

comes to fruition, over-supply might result in

Bellary Road

10%

their 2007-08 peak levels.

the city's office market.

Whitefield

10%

Banswadi

4%

Kolkata

• In Chennai's CBD, lease values quoted for

Rajaji Nagar

3%

J.P. Nagar

3%

• During 2008, Kolkata's office market

while rates for IT spaces are being quoted

witnessed the infusion of approximately

between Rs.60-70/sq.ft.

Source: Knight Frank Research

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

non-IT spaces range from Rs.70 Rs.80/sq.ft.,

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.