Real Estate Report Aug 2009

Indian Real Estate Market- An Update

INDIAN REAL ESTATE MARKET- An Update BACKGROUND ......leading to boom in real estate market In Feb 2005, Government of India allowed FDI up to 100 per cent under automatic route in townships, housing, built-up infrastructure and construction-development projects. Construction development projects also included housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure. The opening of the sector led to huge foreign money coming to India accelerating the growth of the industry. High liquidity in domestic markets and access to cheap debt in international market left Indian RE companies highly leveraged. The companies started accumulating land banks and launching huge projects in form of residential & industrial townships, big malls and housing targeted towards upper middle class and HNIs. Increasing property prices and easy availability of loans at low interest rates led to high investment demand for homes and office space. High growth in IT & ITES and retail Industry led to high demand for office space in Metros and big cities. Easy availability of loans, low interest rate scenario and rising disposable incomes led to increase in demand for homes ...Tide turning against the market - 2008 The meltdown of global financial market which begun in late 2007 with fall of subprime market in the US and fall of big US financial institutions like Lehman Brothers in early 2008, led to reverse flight of funds from emerging markets like India, China to their home countries. In the wake of rising inflation, beginning second half of 2007 and continuing till most of 2008, RBI pursued a tighter monetary policy increasing CRR, Repo Rate, reversing rates and putting curbs on ECB. This led to a severe liquidity crunch in the financial markets and made it difficult for developers to access funds leading to delay in projects. The rising interest rates to about 12% - 13% during 2008 from about 6% to 7.5%n during 2006 and 2007 made access to home loans difficult and costlier leading to decline in demand for homes. ITES industry which was a huge driver of commercial real estate demand in India got badly impacted due to problems faced by US and European financial institutions. This led to a sharp decline in demand for RE by this industry. Impact of Current Meltdown The fall of subprime market and the ensuing liquidity crisis that engulfed the world financial markets had serious impact on the Indian markets. Real estate industry was one of the worst hit sectors in the current meltdown.

The market capitalisation of the major players went down by 50% to 85% during FY 200809. Operating profit declined in the range of 10% to 90% due to lower than expected sales,

Indian Real Estate Market- An Update

decline in prices, high interest cost & delays in project execution due to severe liquidity crunch. Slowdown of related sectors like IT/ ITES further degraded the growth of Real estate sector.

CURRENT MARKET CONDITION- AUG 2009 Housing vertical first to recover; other verticals to follow with a lag: The response to recent mid-income housing launches has been very positive, which has resulted in key developers launching a record ~35msf projects over the last few months. Sales momentum in the residential vertical has picked up since April 2009, particularly in Mumbai and Delhi. Following is a list of key successful launches in recent times:  DLF managed to sell all 1,356 apartments in its upcoming project in West Delhi within 24 hours by offering flats for as much as 32 per cent less than the market rate.  Unitech sold 3.2 million square feet area in just two months during April-May 2009. The company had managed to sell a mere 2.24 million square feet during the 12 months ended March 2009.  Akruti City stated that it has seen sales going up by 30 per cent in the current financial year after a near 80 per cent fall in sales in the second half of 2008-09.  Parsvnath Developers, which launched a 510-flat project in Lucknow in March has sold 480 flats in two months.  According to Nirnajan Hiranandani, MD of Hiranandani Developers, his company has sold more than 2,500 apartments during March-April 2009 in Mumbai.  Jaypee Group claims to have booked all the 3,300 apartments of Jaypee Greens Aman, its new residential project in Noida, within 24 hours of their launch during mid-May.  Tata Housing, which announced its intention to build nearly 1,000 homes priced in the range of Rs.3.9-6.7 lakh during May 2009, received an overwhelming response. The company got nearly 6,000 applications within a week of the announcement. Following the huge demand and to accommodate as many people as possible, the company has increased the number of houses from 1,000 units to 1,300 units. “These are investors who are taking an opportunistic view of the situation where prices have corrected considerably in many locations,” says Sanjay Dutt, CEO business at Jones Lang LaSalle Meghraj (JLLM). He estimates that a good 40% of the stock sold in the last few months would have gone to investors. In Delhi-NCR, this figure might be higher at 50%. While the short-term investor is there, interestingly, a good number of the investors are medium to long-term investors. “These investors are flocking to real estate because of the lack of other investment opportunities in the market at the moment,” says Ajit Krishnan, partner, real estate practice at audit firm Ernst and Young who feels the trigger for these investors was the drop in price points in the residential segment in the last eight months. While the housing vertical has been the first to recover, other verticals such as premium housing, commercial offices and retail could take more time to recover and are susceptible to price corrections in the interim. The following diagrams depicts the current stage of various Real Estate (RE) verticals:

Indian Real Estate Market- An Update

Residential prices to remain under pressure Although housing demand is slowly picking up, media reports suggest that only budget housing projects which are priced lower than the on-going market rates and the ones with innovative schemes have attracted maximum buyer interest. Real estate companies reluctant to slash prices are struggling to clear inventories. Most builders still have a lot of unsold inventories in the high-end residential segment, which can be sold only if they cut prices further. According to Liases Foras, there is ~490msf of unsold stock of properties across verticals, across the major metros. Though the affordable housing vertical is in a growth phase, the prevailing stock of properties could act as a deterrent, as developers may drop prices to liquidate their unsold stock.

According to the latest media reports, seeing good demand for the affordable projects, many real estate companies are considering a marginal price hike. Unitech has already increased the apartment prices in the budget housing projects – The Residences and Uniworld Gardens-II – in the Gurgaon-NCR region by Rs.50 per square feet. Others like Sunil Mantri Realty, Nirmal Lifestyle, Lodha Group and BPTP are planning to hike prices of their affordable housing projects in the range of 3-5 per cent.

Indian Real Estate Market- An Update

Demand for housing is a function of various factors such as property prices, lending rates, income of the individual and value perception. Although prices and lending rates have come down, the concerns regarding job losses and pay cuts have not eased. Moreover, during the real estate boom of the last five years, property prices had sky-rocketed by as much as 4-5 times. Thus, even after a 50 per cent decline, prices have not yet come to the 2003-04 levels. Most consumers are still anticipating further price corrections. There is enough scope for developers to further reduce prices of the high end residential projects. The prices for affordable housing projects are unlikely to witness a sharp rise in 2009, in spite of robust demand. CITY WISE PRICING TRENDS

Mumbai: residential vertical picks up momentum  Sales pick up has been strongest in India  Sales have picked considerable momentum since June 2009  RE prices across key completed projects have increased between 7-12%  The commercial and retail verticals continue to be in a downturn. Delhi/NCR  The residential vertical has witnessed revival since May 2009, largely led by very aggressive price cuts by key developers.  Recent offerings from DLF (Shivaji Nagar) and Unitech (Gurgaon) have evoked encouraging response.  Recovery is still largely limited to affordable housing; premium housing is yet to witness any major recovery.  Commercial and retail verticals continue to be under pressure, with no signs of recovery.

Bangalore

Indian Real Estate Market- An Update

   

Compared to Mumbai/ Delhi recovery is slower Affordable housing launches have witnessed positive response Commercial and retail verticals continue to be weak Due to heavy reliance on the IT offices, recovery for the residential vertical is likely to be delayed in Bangalore.

Chennai  Momentum in OMR, GST Road and Sriperumbudur area, while there is little or no activity in North Chennai.  A number of commercial and retail projects have been put on hold  Some key retail projects have been stalled, including DLF, Pantaloon, and Sriram Mall.  Attractively-priced residential launches by Puravankara and Marg have witnessed good response. Credit availability for RE sector has improved RBI data reveals record growth in bank loans to the real estate sector, contrary to general perception that banks have been unwilling to increase exposure to the real estate sector or that real estate companies are unable to avail fresh bank loans.  February 2009 over March 2008, bank loans to the RE sector grew by 45.7%.  Total bank exposure to the RE sector increased by Rs143b to Rs908b as at the end of February 2009 (3.60% of gross bank credit) compared to Rs765b as at the end of December 2008 (3.04% of gross bank credit). Annual credit to the RE sector was Rs345b, up 204%; the sector’s share of annual credit increased to 8.5% in FY09, significantly higher than 3.1% in FY08.  State-owned banks reported 79.1% growth in loans to the real estate sector, while loans from the private sector grew 13.9%.  However, housing loans dropped 29.4% in FY09, reflecting weak property sales.

Proposed measures in the Budget to improve affordability The Budget proposes sops in personal income tax, which will make homes more affordable. It proposes scrapping the 10% surcharge on personal income tax and the FBT (fringe benefit tax), and an increase in tax-exemption limits across categories. These measures combined together would result in savings of 3-4% on the EMI’s for houses priced >Rs5m/ unit. To revive demand in the affordable housing sector, the government has announced a one per cent interest subsidy on housing loans up to Rs.10 lakh, provided the cost of the house is not more than Rs.20 lakh. The subsidy will be available for the first year of the loan. Further, the government extended tax exemption to housing projects that were approved between 1 April 2007 and 31 March 2008, if they are completed on or before 31March 2012. This is expected to bring the buyers, who were waiting for further reduction in interest rates, back to the market.

Indian Real Estate Market- An Update

Further, the Budget also proposes other measures which, though positive for the overall real-estate sector, are unlikely to have an immediate or major impact on organized players. These measures include an 87% increase in the corpus for the Jawaharlal Nehru Urban Renewal Mission to Rs128.8b and an added Rs39.7b in provision of basic amenities to the urban poor. Besides, the allocation for the Indira Awas Yojna has been boosted by 63% to Rs88b and Rs20b has been allocated to the Rural Housing Fund in the National Housing Bank. The Budget also proposes a program to develop 100,000 units for Central ParaMilitary Forces personnel. WAY FORWARD Demand for housing likely to gain momentum As per CMIE, while significant improvement in demand for commercial and retail property during 2009-10, demand for residential housing will gain momentum. Residential property prices have come down up to 50 per cent from their peak inmany cities and will continue to remain weak in the near term. To improve demand, many developers across the country have announced new discount schemes and many are also planning to offer interest free instalments to customers. Developers are increasingly focusing on mid-income affordable housing to increase the volume of transactions in the housing market. Global property consultancy firm Knight Frank has estimated that affordable housing requirement would be in excess of 2 million units across key cities in India and 80% of demand is expected to originate from the Rs 3-5 lakh income group. It is seen that real estate sector is realigning its focus towards affordable housing and is estimated to reach a whopping market size of over Rs 3 lakh crore by 2011 Further, most PSU and private sector banks have lowered their lending rates. In the last six months lending rates of most banks have fallen by 200-250 basis points. During January 2009, SBI froze interest rates on all new home loans for a period of one year at eight per cent per annum.

The residential segment has huge demand but high property prices and interest rates deterred buyers. Now that interest rates have come down and price corrections are also happening, there is incentive for people to buy. We believe sales volume in the residential segment will pick up further in the next 2-3 months. We also believe that a majority of the demand will come from the end users rather than speculative investors. A downward pressure on the property prices is expected to keep the speculative investors away from the real estate markets in the near term. To boost the demand for housing the government, on Sep 10th, 2009 approved a one percent interest subsidy on home loans, as proposed by the finance minister in his budget speech. This is a welcome step and would make homes more affordable . It is expected to encourage people to make the buying decision.

Note: This update is a compilation from news articles and real estate reports of various research houses Sources: www.economictimes.com www.business-standard.com Motilal Securities (MOSL) research – Real Estate Update Jul’09

Indian Real Estate Market- An Update