Embracing Change

Scripting the future of Indian Real Estate

Table of Contents

EXECUTIVE SUMMARY WORLD ECONOMY & INDIA

BRINGING CHANGE
Second Generation Reforms

7 20

INDIA INVESTMENT LANDSCAPE DEMAND SUPPLY GAP ANALYSIS CONCLUSION

12

Executive Summary
In the last two years, the Indian economy showed resilience to counter the macroeconomic changes and displayed a fast recovery through a growing Gross Domestic Product (GDP) and proactive approach to attract investment. According to World Investment Prospects Survey (WIPS) 2011-2013, while Foreign Direct Investment (FDI) inflows have increased in South East Asia and South Asia, India witnessed a mild setback in the FDI inflows in 2010. The country also witnessed a positive trend in terms of foreign investment during first half of 2011. The long term outlook of the market remains positive as a significant increase was noticed in the value of the deals and the subsectors attracting Private Equity remained diverse. The market is yet to evolve to the level of developed economy, but, the trend of Indian promoters recognizing Private Equity as a consistent source of capital continues to gain ground. The countrys pursuit of rapid growth continues in 2011, albeit this time with a few concerns in the view of the current global economic uncertainty. This may lead to an adverse impact on the 'services and exports' sector in the mid term, if the 'Eurozone crisis' and the instability in the United States of America fail to be resolved in due time. Hence, for India, it is increasingly important to maintain growth in the core sectors in order to sustain the projected GDP growth of 8%. Immediate initiatives to implement planned infrastructure and investment projects from the Central Government can sustain the desired growth momentum. There are corrections and reforms awaited in various fields such as land, manufacturing and retail which would add the much needed boost to the overall economic growth. While the developed economies confront unstable market conditions, India is capable of steering to safer grounds by focusing on core sectors and providing the necessary impetus to the tertiary sectors to retain its growth rate. In this report, Cushman & Wakefield presents a comprehensive view of India's current economic strengths and concerns, discusses the current real estate and investment scenario and outlines those reforms that could define the future of Indian economy.

World Economy & India

It has been too recent in the past since the world recovered, perhaps only partially, from an economic recession, and yet another crisis situation seems to be emerging in some of the developed economies creating a global concern. The cloud over Euro zone's debt crisis continues along with uncertainties over Euro's future and the confidence in the economic leadership is slipping away from USA with its debt rating being downgraded by Standard & Poor (S&P). The message seems to be loud and clear as Robert Zoellick President, World Bank mentioned the situation entering a new danger zone and therefore urged primary economic actors to step up the short and long term policy measures. Further, increasing the discomfort for the global investors, investment bank Morgan & Stanley also downgraded the global GDP forecast to 3.9% instead of 4.2% this year and to 3.8% instead of 4.5% next year. These actions clearly indicate the rising concerns over policy errors and eroding consumer confidence in the USA and the European markets. In spite of counter measures to avoid the situation from deteriorating further, international policy coordination has not proved to be useful so far. According to the International Monetary Fund (IMF), emerging countries will continue to have stronger fiscal and financial positions vis-a-vis their more evolved counterparts.
Top 20 Global Investment Destination Markets
Indonesia Chile Mexico Luxembourg Canada Spain India Ireland Saudi Arabia Australia France Singapore Russian Federation United Kingdom Germany Brazil Belgium Hong Kong, China China United States

50

100

150

200

250

in USD Billion 2010 2009

Source : UNCTAD World Investment Report 2011

Nevertheless, India's pursuit of higher economic growth continues amidst the global economic crisis. Government's investor friendly approach is gradually adding the impetus to make India one of the most preferred investment destinations in the world. According to World Investment Prospect Survey 2009-2012 by United Nations Conference on Trade and Development (UNCTAD), India ranked second as a foreign direct investment destination in 2010. From January to April 2011, the total FDI inflow in India was recorded at INR 291,890 million. India has also gained considerable importance with the country's outward FDI increasing substantially. During the first two quarters of 2011, the total value of acquisition by Indian

companies outside the home clocks to USD 5.89 billion covering 86 deals. The increase in fixed investment was recorded at 16% in 2010 and is expected to continue with a double digit growth during 2011. Government's outlook to boost the infrastructure sector through investment has added the much needed impetus to the related manufacturing sectors. The Government of India has already approved fund raising worth USD13.24 billion by companies through External Commercial Borrowings (ECB) or Foreign Currency Convertible bonds (FCCB) for infrastructure projects in 2009-2011. The Government also plans to increase infrastructure spending on roads, ports, airports and other crucial sectors.

India is not just a rising power, it has already risen. Its economy has risen at a breathtaking rate... we look forward to a greater role for India at the world stage.

We remain bullish on the domestic growth outlook in India, in fact India is one of the most resilient Asian economies during the global economic downturn.

Barack Obama President of the United States

Fan Cheuk Wan Managing Director Head of Research - Asia Pacific Private Banking Division, Credit Suisse

Domestic Economy
The recently emerged trends have also illustrated tremendous growth potential in the sectors like logistics, media and entertainment, and retail. India's retail sector is already reaping the benefits of FDI for single brand and wholesale formats; however, the proposed FDI in multi-brand is expected to unlock the domestic growth potential further. While India strives to pursue a high GDP growth rate, it leaves the country susceptible to high current account deficit, rising inflation and volatile market conditions creating concerns with their downward pressure on currency. Despite these concerns, which are likely to be short-lived as per current market sentiments, the long term economic outlook for the country looks promising with appropriate structural reforms, deregulations, and major infrastructural roll outs with definite timelines. The Government's initiatives through the Lokpal Bill and the proposed Land Acquisition, Rehabilitation and Resettlement (LARR) Bill exhibit the country's attempt to have a consistent, progressive and dynamic socio economic environment, conducive for growth.

In spite of the concerns, which are likely to be shortlived, the long term economic outlook for the country looks consistent with appropriate structural reforms, deregulations, and major infrastructural roll out accomplished in definite timelines.

Bringing Change Second Generation Reforms

The economic growth so far has been gradual in approach with planned and coordinated policies in various sectors, unveiling India's growth potential to withstand the macroeconomic instability and become a stronger, more resilient and stable economy. However, to consolidate its position further against a rather volatile global economic backdrop, India is awaiting a second generation of reforms. The need to have an inclusive and sustainable growth can only be achieved with policy reforms especially with regards to land, financial, trade, investment, infrastructure and manufacturing. The government has taken up an active role in coming up with several regulations (see table 1) and some of them are already at the advanced stages of discussion. Reforms related to land, investment and taxation, which have a direct impact on the real estate sector, are briefly discussed below.

Table 1 - Proposed second round of reforms

Land reforms Land Acquisition, Rehabilitation and Resettlement Bill ? Consent of 80% of the project affected families required ?governmental help No in acquiring land for private companies for private purposes ? A comprehensive rehabilitation and resettlement scheme will be applicable as necessary ? Sharing of 20% of the appreciated land value upon each transfer (without development) within 10 years Real Estate Regulation Bill ? Establishment of a regulatory authority ? Bringing all project details into public domain Residential Tenancy Act ? Balancing rights and responsibilities of landlords and tenants

Financial reforms Banking Laws Amendment Bill ? access of Increase nationalized banks to capital market Prevention of Money Laundering (Amendment) Bill ? more financial Bringing institutions under the radar Direct Tax Code (DTC) ? Replaces the existing Income Tax Act, 1961 ? for foreign Tax rate companies will be same as Indian companies ? Implementation of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) on Special Economic Zones (SEZ)

Trade and Investment reforms Goods and Services Tax ? an all-inclusive Provide tax structure ? Removes the cascading effect - replaces multiple indirect taxes at the state and central levels Foreign Direct Investments (FDI) in retail & multi brand retail ? Opening up of multibrand retail sector to foreign investments with a cap of 51% ? should be Stores opened in the cities with a population over 1 million ? Minimum capital required for FDI is USD100 million ?of goods and 30% commodities should come from local suppliers

Infrastruture and manufacturing reforms National policy for Public-Private Partnership (PPP) ? Eliminate inconsistencies in current rules ? India Set up Infrastructure Debt Fund National Manufacturing Policy ? National Investment and Manufacturing Zones (NIMZ) - to give a boost to the manufacturing sector ? Facilitate regional development ? contribution Increase of manufacturing sector to GDP from 16% to 25% by 2025

The current macroeconomic environment in the country indicates the necessity of bringing in some reforms in the taxation, investment and banking policies. The proposed banking sector reforms are expected to strengthen the rural economy. Implementation of Goods and Services Tax (GST) could be beneficial in simplifying financial transactions at various levels by replacing the existing multiple taxation system. As per the recent estimates by the National Council of Applied Economic Research (NCAER), GST is expected to contribute anywhere between 0.9 - 1.7% of GDP to the economy on an annual basis by reducing the cascading effect inherent in the current tax structure. Despite its large scale

contribution to the economy, real estate sector is overlooked by the proposed dual GST structure. The stamp duties, registration charges and service tax systems pertaining to land and real estate are heterogeneous among states and are likely to result in controversies for the implementation of GST. Direct Tax Code (DTC) is another tax reform that will be implemented in the next couple of years. Introduction of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) on Special Economic Zones (SEZs) as a part of the Direct Tax Code (DTC) may impact the profitability of some key sectors such as IT/ITeS, Biotech and Manufacturing which occupy a majority of SEZ space in the country.

To substantiate the country's economic growth policy, it is important to have a well laid out land policy, as the impact of any regulatory or policy changes pertaining to land are going to be multifold and long term in nature. The proposed Land Acquisition, Rehabilitation and Resettlement (LARR) bill is believed to put some pressure on manufacturing and real estate sectors, where large scale expansion is dependent on land acquisition. On the other hand, opening up of multi-brand retail sector to foreign investments will add momentum to many of the corporate backed major retail players like Wal-Mart, Carrefour and Tesco to venture into India. FDI in the retail sector would not only lead to a substantial surge in the country's GDP and overall economic development, but would also help in integrating the Indian retail market with that of the global retail market apart from providing employment. Continued economic growth in the country and population pressures in urban areas have necessitated the need for large scale development and modernization of infrastructure. India would double its investments in infrastructure to USD 1 trillion during the 12th Five Year Plan that begins in

2012. The proposed policy for Public-Private Partnership (PPP) model for development could help streamlining the approval process and help eliminate inconsistencies in current rules for infrastructure projects. The regulation will help the projects in getting higher returns thus making investments more profitable. The proposal of setting up India Infrastructure Debt Fund is also a major factor for this sector. Employment numbers are also expected to grow on the national scale. Urban areas are likely to grow and the real estate market would be positively affected by the improved infrastructure. Though the first generation reforms have initiated a stronger economic base for India, today, it seems to have run out of steam to close the missing links in the economy. With concerns growing over inflationary pressures, widening trade deficit coupled with the falling GDP numbers, it is evident that second generation of reforms are needed to pave the way for India to be at par with global standards. India would also need to have a proactive attitude towards strategic reforms in many other areas like agriculture, irrigation, education, delivery of public services, including primary health, urban facilities, better connectivity in rural sector and law and order.

India Investment Landscape

During the year 2010, India suffered a marginal drop in the total Foreign Direct Investment (FDI) received, primarily attributed to the macroeconomic instability. FDI in real estate sector fared no different from the overall FDI inflows. The market continued to attract interest and investments from foreign investors during the first half of 2011 and private equity investments in the real estate segment also registered an increase in activities as compared to 2010. As opposed to 2010, when a good share of funds flowing into the realty sector was sourced from the public markets, equity funding in 2011 was noticed to be dominated by the private equity market.

FDI Inflows in Real Estate & Housing Sector

With the investment market yet to reach the pre-recession levels, FDI inflows in the real estate market remained modest during the first quarter of 2011 in comparison to previous quarters. The total FDI inflow in real estate sector was recorded at INR 4,690 million during the first quarter of 2011. This represents approximately 3% of Indias overall FDI investments which is lower than the investment registered during the same time period in 2010. After a weak start, rising FDIs in the following months signal a positive sentiment amongst the global investors. This provides a positive outlook for the rest of the year.
Overall FDI Inflows and FDI inflows in Real Estate & Housing Sector
FDI Inflows (INR Billion)

1,600 1,400 1,200 1,000 800 600 400 200 0

1,397

1,310 962

158 2008

155 2009
Year

68 2010

153 5 2011(1Q)*

Overall FDI

FDI in RE & Housing

Source : DIPP, Ministry of Commerce & Industry, India Compiled by Cushman & Wakefield Research

Private Equity Market

Faced with the difficulty of raising funds from traditional sources such as banks and public equity etc., several real estate companies opted for private equity funding during the year 2011. Despite no significant growth in the number of deals, the value of deals being committed was seen to be on the rise. As of August 2011, a total of approximately INR 36,290 million has been recorded as private equity investment in the real estate industry. The amount of investment raised through private equity route during the first half of 2011 was noticed to surpass the total investment during the same period in 2010. Bangalore emerged as the top recipient of private equity funding with the highest quantum of investment during the first half of 2011 followed by Mumbai and NCR. Mumbai, which had witnessed the maximum investment in 2010, saw a dip during 2011. With respect to number of deals, NCR witnessed a majority of the private equity deals followed by Bangalore and Mumbai. The quantum of deals happening in other Tier II and Tier III cities have seen a dip over 2010 levels. With Bangalore outshining other cities, the southern
* January to March 2011 ** January to August 2011

region accounted for majority of Special Purpose Vehicle (SPV) deals in 2011.
Announced Private Equity Real Estate Deals
30 25
Number of Deals

~70

20 15 10 5 0 2008 2009
Year

2010

2011 YTD**

Compiled by Cushman & Wakefield Research Note: The year 2008 has witnessed approximately 70 private equity deals

Announced Private Equity Real Estate Investment

220 200 180 160 140 120 100 80 60 40 20 2008 2009 2010 2011 YTD
**

Transaction Size (INR Billion)

Year

Compiled by Cushman & Wakefield Research

While categorizing investments based on the asset class, fund flow into the office space emerged as the highest due to the big ticket sized deals in this sector during 2011. The large size transactions in office space were primarily pertaining to investment in leased assets. Investment in leased asset which started with a few transactions in 2010 registered a significant growth during 2011. This provided an opportunity for funds to minimise risk and enabled the developers to raise funds. Approximately INR 16,700 million of private equity investment during 2011 was in leased asset developments. The residential sector registered the maximum number of SPV deals till date in 2011 as investors' preference for this segment is high largely due to the ease of exit. Investment in mixed use real estate developments which had been registering a slow down over the last few years continued to witness a downward trend in 2011. Also the retail sector, which had not seen significant investment in the recent past also

Announced Private Equity Real Estate Deals by City

14 12
Number of Deals

10 8 6 4 2 0 2008
Mumbai NCR

2009
Year Bangalore

2010
Chennai

2011 YTD*
Other

Compiled by Cushman & Wakefield Research Note: Other cities includes Hyderabad, Pune, Kolkata, Chandigarh, Ludhiana and Nagpur Private equity deals include SPV and Portfolio deals

Announced Private Equity Real Estate Deals by Asset Type

20 18

Number of Deals

16 14 12 10 8 6 4 2 0

2008 Mixed Use

2009 Residential

2010

2011 YTD

Year Office

Hospitality

Retail

Compiled by Cushman & Wakefield Research Note: Private equity deals include SPV deals only

Announced Deals
Location Leaseable Area (sft) Land Area (acres) Major tenants Goregaon, Mumbai 700,000 NA Hyderabad 400,000 NA Lower Parel, Bangalore Mumbai 65,000 NA NA 13,000,000 - Potential 8,000,000 is ready & leased 110 IBM, Fidelity, Philips, ANZ-IT, Alcatel-Lucent, NVIDIA, Target, Northern Trust Bank, Monsanto and Cognizant 99% Manyata Promoters

Accenture, HP, Cognizant, TATA AIG, I Gate BoB Legal, and and HCL General and Integron 96% Kotak Realty Fund Tata Realty Initiatives Fund-I 5,250 100% Phoenix Infocity Private Limited Ascendas India Trust 1,739
**

Leasing status Seller Buyer

NA PVR Ltd.

Infinite India Blackstone Investment Management 1,000 8,750

Amount (INR mn)

Remarks The amount mentioned is for two of the buildings, with a total super built up area of 400,000 sq ft which are completed and fully occupied. The other three buildings, with a total area of 1.8 msf will be acquired as and when each is completed and is leased out.
Compiled by Cushman & Wakefield Research * January to August 2011

registered moderate investment through private equity funding. Private Equity market in India was primarily driven by domestic funds. The cautious approach adopted by foreign investors could be primarily attributed to the current turmoil in the global economy.

In addition to the growth in private equity investments, the number of exits in the market has also seen a growth during 2011 due to the maturity of investments.

Investments in Public Equity Market

Contrary to 2007 where the real estate industry had witnessed significant amount of funding raised through the Initial Public Offerings (IPO), the year 2011 registered a scale down in the IPO market. The volatility in the capital market due to factors ranging from inflation, hike in interest rates, as well as Euro zone debt crisis have impacted the IPO market in all the sectors, including real estate and infrastructure. The recent hike in mortgage rates by the Reserve Bank of India coupled with probability of price correction in major cities has accentuated a decline of real estate stocks. Despite a slowdown in the IPO market, the last quarter of 2010 witnessed a few IPO launches namely, Oberoi Realty Limited and Prestige Constructions.

Investment from Public Market

Year

IPO Aggregate Amount (INR million) 1,513 49,646 NA 4,688 23,060 NA

No. Of IPOs

QIP Aggregate Amount (INR million) NA NA NA 136,709 23,064 NA

No. Of QIPs

2006 2007 2008 2009 2010 2011 YTD*

1 6 NA 1 4 NA

NA NA NA 10 3 NA

Compiled by Cushman & Wakefield Research

* January to August 2011

10

Investments in Land Banking

Buoyant investment activities were witnessed in 2007 towards land banking as developers had started their extensive expansions and needed to add land to their inventory. Post 2009, increasing number of big ticket land transactions exceeding INR 5,000 million were registered. Close to INR 121,031 million worth of land deals were closed till August in 2011, which however represented a slowdown of approximately 21% over 2010. in 2011, 66% of the total transaction value registered was pertaining to land acquired for commercial space. NCR (Noida) followed by Mumbai outweighed other cities in India in terms of the land transaction amount.

Representative Land Deals in 2011 Seller NOIDA Authority NOIDA Authority Silver Oak Mafatlal Industries Aricent Group SEMCO Electronics Emaar MGF Buyer Wave Logix Group South Asian Real Estate Gliders Buildcon LLP Ambience Developers Knoor Bremse SPS-Mani Group Area Total Price Price per Acre (Acres) (INR million) (INR million) 400 200 100 7.6 17.6 10 5.5 65,000 9,750 2,000 6,058 2,060 500 2,100 162.37 48.75 20.00 792.93 116.85 50.00 381.82 City NOIDA NOIDA Panvel Mumbai Gurgaon Pune Kolkata

Compiled by Cushman & Wakefield Research

Investment Outlook
? account of government encouragement On ? Developers are likely to postpone their plans

for investments in infrastructure, it is likely to emerge as an important investment destination for private equity firms.
? further tightening of lending norms With

to tap the public market for funding purposes due to the current investment environment.

by financial institutions anticipated in the short term, the share of private equity funding in real estate sector is likely to grow in near future.

11

Demand: Supply Gap Analysis

This section is aimed to estimate the projected demand of real estate asset classes in India for the forthcoming years. The changing economic scenario across the globe has altered the sectoral dynamics and real estate was not immune to the phenomenon. The caution exhibited by the sector in the light of the varying fundamentals, have been accredited appropriately. The optimism for a brighter future revealed in 2010 has been aptly moderated. This had made it all the more imperative to revisit the previous estimates at this juncture. This study captures the gap between the demand and supply across the office, retail, residential and hospitality asset classes. An indepth analysis of various factors ranging from the household income, home loans, GDP, population growth and work force migration were some of the elements of the study. A close assessment of the parameters yielded very interesting results which concurred with the prevailing trends. The forecast model has been further examined to assess the impact on the demand and supply dynamics on the real estate sector.

12

Residential Sector
The residential sector was characterised by positive sentiments witnessing significant recovery across the major cities in terms of renewal of buyer confidence or improving job conditions, prices attending new high; however a cautious approach was evident in most of the residential markets. Consistent end user interest fueled demand but the growth for the same was deterred by several factors like the rising interest rates, inflation and some socio political conflicts in certain cases. The quick rebound witnessed by the housing sector in 2009 - 2010, raised a few concerns pertaining to the sustenance of this growth and stability in the sector. Confronted with high construction costs and inflation, several developers have been forced to raise the property prices. To add to it, RBI increased home loan interest rates, causing much worry for the end consumer. On the whole, higher prices and rising financing costs have resulted in dampening of property sales during the year. In 2011, several residential markets have attained their earlier established peak levels in terms of property prices as a result of increasing construction costs and anticipated demand. Premium micro markets in southern Mumbai and Central Delhi were noticed to have surpassed the peak price levels. On the supply side, during the first half of 2011, the residential sector registered a number of project launches across the top seven cities. A detailed study of the major cities across India reveals that on a relative measure, markets like National Capital Region (NCR), Bangalore, Chennai and Kolkata have strong end user demand compared to Pune and Hyderabad. witness a demand for 3.94 million housing units growing at a CAGR of 11%.
Residential Demand - Supply Projection (Top seven cities)
700 Housing Units (in thousand) 600 500 400 56% 300 200 100 0 2011 2012 2013 Year Supply Demand Gap (%) 2014 2015 54% 52% 50% 62% 60% Gap (%) 58%

Source : Cushman & Wakefield Research

Additionally, the total housing demand across top seven cities in India from 2011-15 is expected to be around 2.36 million units. Of this total demand, the mid-ranged housing segment is expected to drive the maximum demand (45%). Majority of the developers in the top seven cities are concentrating on this segment which would help reduce the supply /demand gap. On the other hand, the affordable segment of the property market which is likely to register approximately 3 times more demand than supply might see gap increasing during the next five years (2011-15). Among the seven major cities, NCR housing market is likely to witness the maximum demand during the period 2011-15 followed by Mumbai and Bangalore. As a result of significant population migrating into the Tier I cities, these locations are likely to witness highest demand. While Mumbai residential market is expected to grow at a CAGR of 14% during this period, NCR and Bangalore are anticipated to grow at a CAGR of 11% and 10% respectively. Likewise the supply of residential units, is likely to be highest in cities of Mumbai and NCR in order to cater to the rising demand. Despite the expected increase in

Demand Supply Analysis

Housing Shortage still remains one of the biggest challenges for India. According to Cushman & Wakefield Research, property markets in India from 2011-15 is likely to

13

the demand and supply, the gap in the Tier I cities is likely to remain substantial with demand exceeding supply by at least 2.5 times in the next five years.
Demand - Supply Projections 2011 - 2015
Mumbai

Impact on Real Estate

The anticipated demand is likely to exert an upward pressure on property prices especially in markets like NCR and Bangalore where the demand supply gap is high. As a result of the relatively lower demand supply gap between 2011-15 in Tier II cities, the capital values in these cities are likely to appreciate at a slower pace compared to the Tier I cities during this time period. With the gained momentum in 2010 in the residential market, developers in the Tier II cities launched several high end projects in order to take advantage of the positive market sentiments. As these projects are expected to reach completion over the next few years, these cities are also likely to witness a substantial supply in the high end segment. Thus the appreciation of high end property prices in these markets might witness a gradual slowdown. The Low Income Group (LIG) and Economically Weaker Section (EWS) housing segments will continue to see a high demand supply gap in the next five years. Several policy reforms by the Government of India and State Governments are expected to have an impact on the demand supply scenario. Several states across India are considering allocating a percentage of developed land to LIG and EWS in order to meet the demand arising from this segment. As a result, boost in supply in the affordable segment is expected. The housing demand supply scenario from 2011- 15 and the resulting gap is likely to reduce based on the current market scenario in the next five years. Despite the current cautious stand adopted in the housing market, the cumulative demand in top seven cities from 2011-15 exceeds the supply by 2.3 times, and is likely to keep the market buoyant during the next five years. However, the upcoming supply needs to be priced judiciously along with appropriate location, infrastructure, connectivity, relevant features and amenities to ensure absorption.

Pune

Hyderabad

Kolkata

NCR

Chennai

Bangalore 0 200 400 600 800

Housing Units (in thousand) Gap Demand Supply

Source : Cushman & Wakefield Research

14

Commercial Office Sector

The world economy that was expanding at a favorable pace in 2007-08 went into contraction in 2009 due to the economic turmoil. Recovery was evident during 2010 but it was short lived and is threatened by the crisis in the Euro zone. The countrys economy has grown at an average rate of 8.8% during 2003-04 to 2006-07, with the 2006-07 growth rate of 9.6% being the highest in the last 18 years. Inspite of the global downturn during 2009, India's quick economic revival along with the favourable GDP growth rate, compared to the other emerging and developed nations, makes India an attractive destination. The recession had significantly impacted the office space demand in 2009, which recorded a decline of 50% compared to the previous year. This resulted in increase of vacant stock and decline in rents across most cities. In 2010, scaling up of operations by several companies against the backdrop of economic resurgence resulted in increased transaction activities. The demand in 2010 was recorded at 39.6 million (msf) square feet which was a significant 67% higher than 2009. Going forward, this momentum is likely to continue but at a slower pace as indicated by the performance in the first half of 2011 and the world economic sentiment. During the first half of the year, supply was recorded at 17.4 msf indicating a decline of 21% from the previous year same period. The overall demand for 2011 is estimated to be 37 msf registering a minor decline over the previous year. IT/ITeS sector, which was the highest demand driver, reported to lose the share of the total absorption with the take up by Banking Financial Services & Insurance (BFSI) segment increasing swiftly in select cities. As a result of changing demand dynamics and restricted supply, the vacancy levels across most cities underwent marginal changes.

Demand and Supply Analysis

According to Cushman & Wakefield research, cumulative pan India demand in next five years is expected to be 267 msf, with Bangalore, NCR and Mumbai constituting 47% of the total demand. However, other cities such as Chennai, Kolkata and Hyderabad are likely to see the healthy growth in demand over the years.
Office Demand - Supply Projection (Top seven cities)
60 50 Million sft 40 30 20 10 0 2011 2012 2013 Year Supply Demand Gap (%) 2014 2015 0% -5% -10% -20% -25% -30% -35% -40% Gap (%) -15%

Source : Cushman & Wakefield Research

Availability of talent pool for IT/ITeS sector, quality supply at comparatively lower prices and supporting government policies are a few factors which drive demand in the major seven cities. Bangalore will dominate the demand for office space throughout the period (2011-2015) where the demand is anticipated to exceed the supply. The demand trend in Bangalore has been consistent and is likely to continue. Grade A supply for seven major cities is likely to be 243.5 msf till 2015 following an inverted 'W' trend beginning from 2011 as per Cushman Wakefield research. Majority of the supply will be operational in Mumbai, followed by NCR and Chennai during 2011 - 2015. Interestingly, cities such as Bangalore, Kolkata and Pune are likely to witness a negative supply growth over the period under consideration, primary reason being fewer planned projects owing caution exhibited by the developers.

15

Chennai is anticipated to see the highest real estate activity with the highest demand and supply growth during next five years. On the other hand, Kolkata is expected to have lowest demand-supply gap owing to reduced pace of supply and second highest growth in demand during the next five years.

and lesser availability of space is likely to prevail in the city unless second generation supply increases. This may put an upward pressure on rentals in select micro markets.
Demand - Supply Projections 2011 - 2015

Pune NCR

Impact on Real Estate

The analysis shows that the supply will be exceeding the demand for commercial office spaces in the next 5 years at the prevailing economic conditions. However, with an improvement in the overall situation the demand may accelerate. On the contrary, if the pace of growth is slowed, during the next five years, it may lead to increasing vacancy. The corporate clients in such a scenario will look for better value proposition in terms of rents, maintenance cost, parking etc. while expanding and consolidating operations. Bangalore is expected to be the only exception where demand is likely to exceed planned supply in the forthcoming years, indicating the potential for developments. Scarcity of options

Mumbai Kolkata Hyderabad Chennai Bangalore -60 -40 -20 0 20 40 60 80

Million sft Gap Demand Supply

Source : Cushman & Wakefield Research

Having analysed the demand trend in major seven cities, it is noted that the demand by the end of 2015 is still not likely to exceed or meet the pre-recessionary times indicating a gradual recovery mode.

16

Commercial Retail Sector

India maintained its top position in the Nielsen Companys global Consumer Confidence Index in the second quarter of 2011 illustrates the rich and diverse demography and indicates a good consumer base. Private final consumption in the domestic market continues to maintain a steady year-on-year growth. Despite the prevailing inflationary conditions in the economy, rising aspiration of the middle class, growing urbanization and increasing disposable income has kept the basic consumer demand intact. The retail market in the country is maturing and becoming more complex and competitive. The economy, though reflects increasing confidence, is characterized by cautious and weighed initiatives. Retail operations are becoming more sophisticated with increased consolidations and intense competition in pricing and promotional activities. New players, international as well as national and regional, are coming in and expanding into new categories and formats, and reaching out to a new set of customers. The industry is witnessing growing saturation in existing markets; and increasing dissemination of retail into new destinations. Most of the upcoming developments are expected to be launched with around 60-62% occupancy levels, based on past experiences. The overdrive in delivering large volume of retail projects, over the last half a decade, has been gradually replaced with quality developments today. In the nascent stages of industrys life-cycle, retail developments were perceived to be capable of yielding better and quicker returns leading to large-scale infusion of retail spaces. Expectedly, though unfortunately, this led to an oversupply of malls and several unsuccessful developments. In the second phase, however, the deficiencies are being realized and rectified, with the result that there have been significantly better developments in the recent times.

Demand and Supply Analysis

As per Cushman & Wakefield Research, total demand for retail space in malls across India during 2011-2015 is expected to reach approximately 57 million square feet, recording 37% compounded annual growth rate (CAGR). Additional retail space demand in the main streets is expected to be at approximately 112.57 million square feet.
Retail Demand - Supply Projection (Top seven cities)
12 10 Million sft 8 6 4 2 0 2011 2012 2013 Year Supply Demand Gap (%) 2014 2015 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% -120%

Source : Cushman & Wakefield Research

The share of the total demand in the top 7 cities in the demand for retail space in malls across India is expected to be about 55.9% for 20112015. NCR, Bangalore and Mumbai will continue to dominate accounting for 43% of the demand. NCR is likely to witness highest cumulative demand for retail space in malls at
Demand - Supply Projections 2011 - 2015

Pune NCR Mumbai Kolkata Hyderabad Chennai Bangalore -10 -5 0 5 10 15

Million sft Gap Demand Supply

Source : Cushman & Wakefield Research

Gap (%)

17

approximately 11.8 million square feet by 2015 followed by Bangalore with demand anticipated at 6.6 million square feet. Situation of oversupply of mall space is likely to prevail till 2014. Moreover, if the organized retail growth continues with its steady trend, the demand is expected to rise above the supply levels in 2015. Over supply situation is likely to be more pronounced in Pune as the city is likely to witness delivery of substantial supply during the period 2011-2015. The demand supply situation will be balanced in Mumbai with demand anticipated to firm up in the coming years. The supply scenario across Tier II and Tier III cities of India is far moderate over the five year period. The demand for retail space is likely to increase in the medium term as more retailers are exploring opportunities in these cities.

commencement of construction. Projects which were announced during the period of volume growth (2005-2008) in retail are likely to be revisited keeping a few factors in mind such as proximity to other similar developments, lack of requisite catchments, retailers disinterest. Developers interested in new retail ventures are contemplating on conducting due diligence to ascertain the success of their project. This is likely to assure them of pre-commitments from retailers prior to commencement and improve prospects of returns for the investors. Investor community may continue to remain apprehensive of any major investments in retail developments till the time the oversupply situation balances or retailers exhibit clear commitment and preference for a designated project. Moreover, investors may, in exceptional cases, show interest or fund notable and differentiated projects on account of their standing be it with respect to design, concept, catchment or branding. Developers and retailers are likely to take more joint initiatives to understand the core requirements of each channel partners such as for project planning, development and operations or even sharing risks at each step like revenue sharing rental arrangement among others. If all the estimated supply meets the timelines, there would be relatively disproportionate infusion of mall supply compared to the demand projections across the major cities; with most cities likely to record higher vacancy levels. Certain cities like Mumbai or Hyderabad may also witness increased pressure on the high streets in the short term. Rentals as a consequence are likely to see upward trend. Moreover, high streets across the major cities like Bangalore, Kolkata, Mumbai or NCR are increasingly witnessing shortage of retail space. This may lead to expansion of the existing high streets or emergence of newer markets in untapped destinations with good catchment in the peripheral locations where new developments are underway.

Impact on Real Estate

The retail real estate market in the country is likely to see intensive screening and crucial studies on project viability before

18

Hospitality Demand
India's growing potential as a leisure and business tourism location, while having a noticable shortfall of quality hospitality product, makes the country a very potent choice for investors, developers and operators alike looking at establishing and expanding their brands in the country. Post the global economic meltdown of 2008 - 09 there have been various trends emerging in the hospitality sector. Notable is the growth of Mid Market and Budget hotels. Hoteliers identified a burgeoning gap in this segment across most cities in the country and planned a strong pipeline of various hotel projects across the country. Midmarket and Budget hotels are cost effective for all - the developers, the operators and the guests. They serve as an ideal model for those hoteliers who are keen on establishing their presence in Tier II and Tier III cities. Another emerging segment in hospitality is that of MICE (Meetings, Incentives, and Conferences & Exhibitions). There is a need for the development of quality MICE infrastructure to penetrate deeper into the segment. The trend is significantly supported by the Government at various levels. Having identified India's share in the global MICE market being only 2%, the authorities are seeking support from various hoteliers and developers to build medium to large convention facilities to enable India as a destination, to tap into the segment. satellite cities of New Delhi like Noida, Greater Noida and Faridabad show growth potential. The demand in this region will grow proportionately. Greater Noida will also host the first ever Indian Grand Prix in October 2011, which is expected to increase the hotel profile in the area.
Occupancy Vs Stock
64% 62% Occupancy Rate 60% 58% 56% 54% 52% 50% 48% Bangalore Hyderabad Mumbai Chennai Pune Ahmedabad NCR Kolkata 46% 30,000 25,000 20,000 15,000 10,000 5,000 0 No. of Rooms

AOR (Estimated 2015)

Stock (Estimated 2015)

Source : Cushman & Wakefield Research

Impact on Real Estate

By 2015, the country will witness the introduction of over 60,000 rooms across major cities. The phasing of these rooms - over years and across categories, is pertinent as the demand segments will differ. The enhancement of the physical infrastructure in the cities, especially the airports, will play a major role in boosting demand for the hospitality sector. The expansion of peripheral locations providing land at relatively cheaper cost, which will attract residential and commercial development, thereby leading to increased hotel demand. The increase in supply will not be met with a proportionate increase in demand and corporate entities will continue to seek ways to economise post recession. This would lead to a potential drop in rates and occupancy levels in the short term and then consolidation in the medium term.

Demand and Supply Analysis

The delay of various hotel developments across major cities in the country, attributed to the global economic meltdown, has helped in coping with the slow demand. In some cities, the compounded effect of slow demand and new inventory created sharp gap in demand and supply. However, the demand is showing signs of recovery. The trend will continue as

19

Conclusion
The global economic uncertainty rising out of the sovereign debt crisis, US credit rating down gradation, Euro zone crisis and downward pressure in Japan's economy has accelerated the shifting of the economic power axis to the emerging economies. The high growth rate and dynamic environment of the emerging Asian economies are increasingly gaining confidence of the global investors. China and India being the two prominent economic powers of the region are likely to dictate the global investment environment in the near future. The appetite for real estate investments has subsided largely due to the slowdown in the Indian economy and increasing real estate prices. In the absence of real estate investment instruments like Real Estate Investment Trust (REIT) in conjunction with Real Estate Mutual Fund (REMF), the real estate sector suffers from several shortcomings including less transparency and lower liquidity. With these becoming active, the real estate market will get a structured monetization vehicle for the capital intensive commercial office and retail market. The present economic situation may be viewed as a transitory point for the real estate dynamics in India. Although, the market looks positive in the medium term with considerable demand across sectors, the industry seems to be plagued with thoughts of the revised land acquisition policy and rising interest rates. Simultaneously, end users and developers are feeling the heat of a continuous rise in construction costs and inflation. However the long term perspective suggests that the sector will continue to witness demand in all asset classes in light of the present economic conditions. As housing shortage remains a critical element for India, the residential segment will exhibit a buoyant trend. The demand of commercial office space across the seven major cities by the end of 2015 is not likely to exceed or meet the pre-recessionary times which reflects the gradual recovery mode. As the organized retail growth continues with its steady trend, the demand is expected to rise above the supply levels in 2015. Private Equity continued as a preferred investment option for real estate. This trend is likely to continue as lending norms get tightened further by financial institutions. The sectors like healthcare and hospitality are also showing a positive outlook in the next few years. However the growth momentum in real estate will largely depend on the overall economic outlook. As the present situation of high inflation and widening trade current deficit causes worry for investors, the Government's early action towards a prevention will be crucial. Hence implementing second generation reforms in regard to land, taxation and FDI in retail, can prove to be crucial for sustaining the growth across sectors.

20

The GRI is a global club of senior real estate investors, developers and lenders. Its mission is to help its members build personal relationships and work together in creating better places as a legacy to our children. Founded in 1998, its core constituency consists the world's leading real estate players. The GRI runs its activities through a series of Annual Meetings focused on different regions of the world, mainly across Europe and Asia to date. Individual and Corporate Membership of the GRI is open to senior players in the real estate industry that find it beneficial to belong to a global community of elite achievers in their industry.

Cushman & Wakefield is the largest privately owned real estate services firm in the world with more than 15,000 professionals in 234 offices in 61 countries. The firm delivers integrated solutions by actively advising, implementing and managing on behalf of landlords, tenants and investors through every stage of real estate process. C&W also provides valuation advice, strategic planning and research, portfolio analysis, and site selection and space location assistance, among many other advisory services. Cushman & Wakefield commenced its India operations in 1997 and today has grown to over 1,400 employees working from the firm's New Delhi, Gurgaon, Mumbai, Bengaluru, Chennai, Hyderabad, Pune and Kolkata offices. The first international real estate service provider to have been granted permission by the Government of India to operate a wholly-owned subsidiary, Cushman & Wakefield in India is strategically poised to service the varied needs of clients throughout the sub-continent. The firm offers a full range of real estate services combining local expertise and experience with technology and standards of service that are consistent across all Cushman & Wakefield's offices worldwide. To find out more about Cushman & Wakefield, visit www.cushmanwakefield.com

Disclaimer This report contains information available to the public and has been relied upon by Cushman & Wakefield on the basis that it is accurate and complete. Cushman & Wakefield accepts no responsibility if this should prove not to be the case. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice. Our prior written consent is required before this report can be reproduced in whole or in part. Changes in socio-economic and political conditions could result in a substantially different situation than those presented at the stated effective date. C&WI assumes no responsibility for changes in such external conditions. Copyright 2011 Cushman & Wakefield (India) Pvt. Limited All Rights Reserved

www.cushmanwakefield.co.in

Ronny Gotthardt Senior Conference Director GRI - Global Real Estate Institute UK Tel: + 44 20 8445 6653 Email: rg@globalrealestate.org www.globalrealestate.org

Sitara Achreja Director Marketing & Communications, India Cushman & Wakefield Tel: + 91 124 469 5555 Fax: + 91 124 469 5566 Email: sitara.achreja@ap.cushwake.com www.cushmanwakefield.co.in

2011 Cushman & Wakefield All Rights Reserved

The GRI welcomes industry leaders who find it useful to chair a discussion at a future GRI event to contact:

For further information on the report, please contact: