India Real Estate Report Q3 2012

www.businessmonitor.
com
Q3 2012
INDIa
real estate report

INCLUDES BMI'S FORECASTS
IssN 2040-7610
published by Business Monitor International ltd.
INDIA REAL ESTATE REPORT Q3 2012

INCLUDES 5-YEAR FORECASTS TO 2016
Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International Copy deadline: April 2012
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India Real Estate Report Q3 2012
Business Monitor International Ltd
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CONTENTS
Executive Summary ......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................. 7
India Real Estate/Construction SWOT ................................................................................................................................................................... 7 India Political SWOT ............................................................................................................................................................................................. 8 India Economic SWOT........................................................................................................................................................................................... 9 India Business Environment SWOT ..................................................................................................................................................................... 10
Real Estate Market Overview ........................................................................................................................ 11 Real Estate Market Analysis Office ........................................................................................................... 16
Supply And Demand............................................................................................................................................................................................. 16 Rents And Yields .................................................................................................................................................................................................. 16 Table: Historic Office Rents, 2010-2011 (INR per m2/month) ............................................................................................................................. 17 Table: Net Office Yields, 2011-2012 .................................................................................................................................................................... 18 Table: Terms of Rental Contract/Lease, H211.................................................................................................................................................... 18 Industry Forecast Scenario ....................................................................................................................................................................................... 18 Table: Forecast Office Rents, 2012 (INR per m2/month) ..................................................................................................................................... 19 Table: Forecast Net Office Yields, 2008-2016 ..................................................................................................................................................... 19
Real Estate Market Analysis Retail ............................................................................................................ 20

Supply and Demand ............................................................................................................................................................................................. 20 Rents and Yields................................................................................................................................................................................................... 21 Table: Historic Retail Rents, 2010-2011 (INR per m2/month).............................................................................................................................. 22 Table: Net Retail Yields, 2011-2012 .................................................................................................................................................................... 22 Table: Terms of Rental Contract/Lease, H211..................................................................................................................................................... 22 Industry Forecast Scenario ....................................................................................................................................................................................... 23 Table: Forecast Retail Rents, 2012 (INR per m2/month)...................................................................................................................................... 23 Table: Forecast Net Retail Yields, 2008-2016 ..................................................................................................................................................... 24 Table: India Retail Sales Indicators, 2008-2016.................................................................................................................................................. 24
Real Estate Market Analysis Industrial ..................................................................................................... 25

Supply and Demand ............................................................................................................................................................................................. 25 Rents and Yields................................................................................................................................................................................................... 25 Table: Historic Industrial Rents, 2010-2011 (INR per m2/month)........................................................................................................................ 26 Table: Net Industrial Yields, 2011-2012 .............................................................................................................................................................. 26 Table: Terms of Rental Contract/Lease, H211..................................................................................................................................................... 26 Industry Forecast Scenario ....................................................................................................................................................................................... 27 Table: Forecast Industrial Rents, 2012 (INR per m2/month)................................................................................................................................ 27 Table: Forecast Net Yield, 2008-2016 ................................................................................................................................................................. 27
Construction And Infrastructure Outlook .................................................................................................... 28

Table: India Construction And Infrastructure Industry Data............................................................................................................................... 28 Table: India Construction And Infrastructure Industry Data............................................................................................................................... 29 Construction and Infrastructure Forecast Scenario.................................................................................................................................................. 31
Macroeconomic Outlook ............................................................................................................................... 38

An Economic Resurgence Or The Calm Before The Storm? ..................................................................................................................................... 38
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Table: India Economic Activity ......................................................................................................................................................................... 43
Real Estate Risk Reward Ratings ................................................................................................................. 44

Real Estate/Construction Risk/Reward Ratings ........................................................................................................................................................ 44 Table: Real Estate/Construction Risk/Reward Ratings ........................................................................................................................................ 44 Business Environment Outlook ................................................................................................................................................................................. 44 Table: BMI Business And Operation Risk Ratings ............................................................................................................................................... 45 Institutions ........................................................................................................................................................................................................... 46 Table: BMI Legal Framework Rating .................................................................................................................................................................. 47 Infrastructure ....................................................................................................................................................................................................... 50 Table: Labour Force Quality ............................................................................................................................................................................... 52 Market Orientation .............................................................................................................................................................................................. 53 Table: Asia, Annual FDI Inflows ......................................................................................................................................................................... 55 Table: Trade And Investment Ratings .................................................................................................................................................................. 56 Table: Top Export Destinations (US$mn) ............................................................................................................................................................ 57 Operational Risk .................................................................................................................................................................................................. 59
Competitive Landscape ................................................................................................................................. 60 Company Profiles ........................................................................................................................................... 62

Ambuja Cements Ltd ............................................................................................................................................................................................ 62 DLF ..................................................................................................................................................................................................................... 64 Parsvnath Developers Ltd.................................................................................................................................................................................... 66 Sobha Developers Ltd .......................................................................................................................................................................................... 68
BMI Methodology ........................................................................................................................................... 70

How We Generate Our Industry Forecasts .......................................................................................................................................................... 70 Construction Industry .......................................................................................................................................................................................... 71 Bank Lending ....................................................................................................................................................................................................... 72 Real Estate/Construction Business Environment Rating ...................................................................................................................................... 72 Table: Weighting Of Indicators ........................................................................................................................................................................... 73 Sources ................................................................................................................................................................................................................ 75
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Executive Summary
In late 2011, BMI conducted its latest round of interviews with in-country sources on Indias commercial real estate sector. The outlook is subdued for 2012, although our sources do predict very slow growth across the board. This outlook supports the current fears over Indias major developers debt levels, rising raw material costs and renewed economic crises in the US and eurozone. In addition, there are areas in the country where retail rents are on a par with those in the US, which has tended to price a number of potential renters out of the market.
However, some bright spots remain for commercial real estate. Indeed, the high retail rents may slow competition for space, but they do highlight the countrys emerging status as a major player in the market, where high-profile retailers will vie to open their own stores. Occupancy levels across the board remain relatively high, making for an attractive investment market.
Economically, India is in the middle of a cyclical slowdown, which we envisage will last for a few more quarters. We are currently forecasting FY11 (ending March 31 2012) GDP growth of 6.8%, significantly lower than the levels seen in 2010 and 2011. Industrial production growth has stalled (which may have detrimental ramifications for the industrial real estate sub-sector) and Indian consumers are tightening spending. We do believe, however, that activity will recover somewhat in FY2012, with our full-year growth forecast currently at 7.3%. Amid a number of economic slowdowns across the region, this is a fairly stable outlook.
Key Opportunities In The Real Estate Market: State governments and bodies like the Confederation of Real Estate Developers Associations of India (CREDAI) are hoping to crack down on unlawful and potentially dangerous construction practices with new requirements and increased transparency.
Competition is set to increase in the commercial sector, as bank lending is leaning towards unlisted players who may otherwise struggle to enter the market.
Key Risks To The Real Estate Market:
Fears remain over major Indian companies debt levels and whether interest rates will increase while they try to reduce them over the next year or so.
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Current reports suggest a major oversupply in retail premises, causing delays to upcoming projects and risking a slowdown in the sector while constructors must wait for demand to increase.
Higher raw material costs mean that developers with vacant space cannot afford to lower their rental levels in order to entice renters into their premises.
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SWOT Analysis
India Real Estate/Construction SWOT
Strengths
Foreign direct investment (FDI) of 100% is now allowed in construction. This will allow significant inflows of capital to meet growing demand from the increasing middle class. There is no evidence that funding is a constraint for developers, or at least the larger ones, in normal economic times. Cheap labour. More than half the population is estimated to be younger than 25. Regardless of the nature and extent of the economic slowdown, growth in construction spending in the longer term is likely to continue steadily, driven by a rising population and growing prosperity.
Weaknesses
Poor working conditions, especially low pay and poor safety prerequisites, are the norm for millions of construction labourers. Bureaucracy is excessive by Western standards, and general infrastructure is weak. Lack of structured regulatory and policy framework, or well defined operating and financing regulations. The governments attempts to allow FDI in retail have been met with resistance from opposition parties.
Opportunities
Population growth rates remain well above replacement level. The number of people living in urban areas is likely to grow significantly, feeding demand for construction. Indias very large cities are predicted to grow over the next 10-15 years, with Mumbai moving from the fifth- to the second-largest city in the world, Delhi from sixth to third and Kolkata remaining in eighth place, but seeing its population increase from around 14mn to around 20mn. Steel production in India seems to be booming, with more than US$130bn total investment recorded. Demand is increasing from the real estate sector, and Indias position as a global producer will help the material remain accessible to local developers.
Threats
India may be unable to cope with its burgeoning population, which has passed the 1bn mark, posing a major threat to the economy as a whole. Fears remain over the debt burden carried by some of Indias major developers. Resulting high interest rates are likely to keep foreign investment in the sector at bay. Oversupply of retail premises, and lack of competition, has caused a number of players to re-design intended retail space to incorporate offices or residential property. The contribution of the construction sector to GDP may fall as low as 8% as the cost of raw materials is rising. This could dampen development activity in the short term.
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India Political SWOT
Strengths
India is the world's largest democracy. A secular constitution, framed in 1950, officially guarantees justice, liberty and equality while aiming to promote fraternity among the citizenry. More than 1,000 political parties registered for the April-May 2009 general elections, competing for the preference of India's 714mn eligible voters. Despite its multitude of problems, India has generally managed to avoid hard authoritarian rule or military coups, which have happened in many other developing countries, including India's neighbours Bangladesh, Myanmar and Pakistan.
Weaknesses
Large coalition governments complicate policymaking at the centre as coalition partners and outside parties pursue their own agendas. The competence of state government varies enormously across India's 35 states and union territories. India's tense relationship with Pakistan still weighs on regional stability. The two countries have gone to war three times since they were 'partitioned' on independence from British rule in 1947. Issues such as the ineffectiveness of the executive and judiciary in controlling underhand practices, the apparent arbitrary allocation of government licences, and the uneasy influence of special interest groups remain key investor concerns.
Opportunities
India has in recent years edged closer to the US in foreign policy. Both the US and India are democracies and face threats from militant groups; this, combined with the presence of a 2mn-strong affluent Indian diaspora in the US, is bringing the two countries closer together. Thawing relations with Pakistan has made it easier for the parties to defuse potentially explosive situations, such as the Mumbai attacks in November 2008, which Islamabad acknowledges were planned and launched from its territory.
Threats
Hindu nationalism presents a growing threat to India's constitutionally enshrined secularism. Communal skirmishes between the Hindu majority and minority groups have sometimes erupted into violence. India has experienced a series of serious terrorist attacks over the past two years, perpetrated by radical Islamist and rural Maoist groups. The surge in Naxalite attacks in 2010 has raised the spectre of further violence.
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India Economic SWOT
Strengths
India has a very large domestic market, and rising domestic demand is a major driver of economic growth. A vast supply of inexpensive but skilled labour has turned India into the back office of the world. Around half of the population is younger than 25. Booming exports of IT-enabled services, from call centres to software developers, are a valuable source of foreign exchange.
Weaknesses
Despite rapid economic growth, India remains a very poor country. According to BMI estimates, India's GDP per capita was US$1,501 in 2011, a third of the size of China's. Agriculture remains inefficient, and poor monsoon rains can slash rural incomes and consumption. Two-thirds of the population depend on farming for their livelihood. India has chronic trade and fiscal deficits, the latter of which has ballooned due to fiscal stimulus measures. The government spends a significant part of its revenue on interest payments, salaries and pensions. This limits the amount of money available for infrastructure improvements.
Opportunities
India's emerging middle class will continue to drive demand for new goods and services. A wealthier society, combined with tax reforms, would serve to boost revenue receipts, relieving fiscal pressure. The government has implemented some tax reforms. A uniform goods and services tax to be implemented in the near future should help boost compliance, thereby raising government revenue.
Threats
India's dependency on oil imports is problematic. This undermines the trade balance and makes India vulnerable to energy price-driven inflation. India is at risk of severe environmental problems. Many of its cities' air and rivers are heavily polluted, raising questions about the sustainability of the economy's rapid growth.
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India Business Environment SWOT
Strengths
India is now one of the biggest recipients of foreign direct investment (FDI) among emerging markets, having attracted US$19.4bn of inflows in FY2010/11. An inexpensive but skilled English-speaking labour force can do the jobs of Western workers for a fraction of the wages paid in North America or Europe.
Weaknesses
Despite pockets of excellence, such as the IT sector, overall literacy rates in India remain far lower than in other Asian and key emerging market nations. India's infrastructure is notoriously inadequate. A 500km road journey can take as much as 24 hours owing to poor road conditions, congestion and toll booths. The competitiveness of local firms is undermined by reams of official red tape, from foreign investment restrictions to inflexible labour laws. Intellectual property rights are poorly protected in India. The country remains one of the 12 countries on the 'priority watch list' for 2011 compiled by the Office of the US Trade Representative.
Opportunities
India could enhance the competitiveness of local industry through further liberalisation and deregulation. Ongoing infrastructure projects ranging from roads, railways and airports are likely to provide opportunities for foreign investors for many years to come. Indian Prime Minister Manmohan Singh is eager to reform the banking sector in order to increase the availability of long-term financing, particularly for large infrastructure projects.
Threats
The arrival of Western players, including management consultants Accenture and technology giant IBM, is bidding up local wages in the outsourcing sector. India faces growing challenges from countries such as Vietnam and, potentially, Bangladesh in a variety of sectors. China still remains a major competitor for FDI flows into India. India has excessive bureaucracy and poor infrastructure in comparison with China. The November 2008 Mumbai terror attacks demonstrated that security issues will remain a key investor consideration.
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Real Estate Market Overview

The depreciating rupee, high interest rates and an overall difficult 2011 have resulted in a largely bleak outlook for Indias real estate in 2012. The global picture remains uncertain, which will have a detrimental effect on investment optimism in the market. However, it is clear that longer-term opportunities may arise from economic prosperity and population growth. According to M.I. Sait, managing director of Mindscape Exhibitions Pvt organiser of the Times Realty India 2012 exhibition in early March returns on investment in the country are high, and the real estate industry is poised to continue its strong growth. Foreign investors are attracted to Indias stable (if not fast growing) economic situation in recent months, while stable rents and high occupancy levels make for lucrative opportunities. Sufficient new space is due online in 2012 to meet continued demand.
That said, the rising cost of raw materials has been a hindrance to development and is likely to continue to do so. It is understood that the construction sectors contribution to GDP could fall to as little as 8% if costs continue to rise. Fears also continue over the high level of debt some listed developers are carrying and investment will continue to be slow if these burdens are not reduced.
While continued high prices and a subdued market are expected in the short term, reports also surfaced in early January 2012 of a surge in interest from non-resident Indians (NRIs) in their native real estate market. As the dollar appreciates against the rupee, activity from NRIs has increased. This is a positive development, as Indian Realty News reported in mid December 2011 that US NRI investment in India had decreased, as a result of debt fears in the US. It is uncertain whether this will become a long-term trend, which will increase the possibility that the commercial market may benefit, but there may also be a corresponding increase in overseas investment from foreign companies looking to take advantage of their currencys strength against the rupee.
As a reflection on increasing sustainable construction in India, media provider UBM is launching the Ecobuild exhibition in India, with the first show in Mumbai on April 16-18 2013. Showcasing sustainable building projects, Ecobuild is set to push the countrys green construction, which currently represents around 5% of the total market, or US$15bn.
Mumbai According to real estate consultant DTZ, Mumbai and Singapore are expected to be the two Asian cities at the head of a real estate price fall in the region. The two locations registered the largest appreciation in price in the wake of the global economic slowdown, and in particular Mumbais prices were so high in recent months as to result in a temporarily stagnant market. Price falls would benefit the city in the short term as investors are likely to take advantage of the better value of property. DTZ also predicts that the situation in Mumbai will precede a similar picture across the country.
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In its 2012 forecast for Mumbai, Jones Lang LaSalle (JLL) reports that the office market in the city will experience a drop in rents over the first half of the year, although it also highlights that conditions are ideal for existing occupiers to consolidate or relocate their premises. Indeed, in late February 2012 it appears this movement had begun, as Cushman & Wakefield reported that Mumbai, for the first time in six years, is no longer one of the top 10 most expensive office markets in the world. Declining rents in Nariman Point the central business district (CBD) in 2011 have caused the citys ranking to slip to 15th. High prices, age of construction and distance from residential areas has resulted in a shift in interest to other parts of the city, like the Bandra-Kurla Complex and Lower Parel, whose office rents have risen in recent months.
As evidence of this changing trend, Indian Realty News reported that Hindustan Unilever the countrys top consumer goods company and Air India have seen the valuations on their CBD properties fall rapidly, and indeed Unilever is struggling to find a buyer. A total of 25% of the oncedesirable space in the CBD reportedly lies vacant.
However, according to a survey conducted by DTZ in late March 2012, Mumbai remains the favourite destination in India for banking, financial and insurance firms to set up offices. The city was described as the hub of all financial activity, implying that rental activity will certainly not stop, rather simply spread over a wider geographical area.
Gurgaon According to a recent report from real estate company 21flats.com, Gurgaons real estate market is weathering the economic downturn, thanks in part to the nearby city of Haryana, which is becoming an industrial hub in the north of the country. The report also cites Gurgaons proximity to Indias capital New Delhi as cause for long-term sustainability in its commercial market. Whether this outlook is common among developers is uncertain, but the report shows that some local companies are retaining their optimism in the sector. In particular, Northern Indian cities have been of interest to the multinational IT companies expanding into the country. Nokia and Google have recently developed headquarters in Gurgaon, which will only entice more companies and trade into the city. Indeed, in DTZs late March 2012 survey, Gurgaon was listed as another of Indias preferred office destinations (along with Mumbai). This was attributed to the citys low costs, established infrastructure and connectivity.
However, having recently become known as an IT hub for northern India, Gurgaons reputation may be on the rocks as a result of an apparent increase in reported crime in the first few months of 2012. Reports have stated that the city remains particularly unsafe after dark, or for women travelling alone. A decrease in public confidence as a result could harm future real estate development, and the citys continuing status as a centre for financial and IT premises.
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Hyderabad It has become clear in early 2012 that constructors in Hyderabad are hoping the new year will usher in a sellers market in the city, as the current mood towards real estate is apparently positive. However, the Confederation of Real Estate Developers Associations of India (Credai) has also stated that supply in Hyderabad is fast being exhausted, while the level of new supply added in 2011 was not sufficient to meet demand. The introduction of the sellers market desired by developers will be dependent on new projects coming online to meet buyers requirements.
Meanwhile, the Times of India suggested in late December 2011 that a government order issued around five years previously (GO86) which labelled many areas of the city as congested zones and imposed building restrictions has now led to a slowdown in both construction activity and land sales. In terms of existing unoccupied space, it seems to be the citys office market that holds the greatest potential for a positive year of sales.
A March 2012 report by financial portal moneycontrol.com has revealed that although existing corporations in Hyderabad have expanded their office space in recent years, very few new companies have set up a base in the city. Apparently 90% of Hyderabads commercial real estate absorption has been at the hands of existing companies who are expanding. The report concludes that this will lead to lower absorption in 2012.
The Greater Hyderabad Municipal Corporation (GHMC) is compiling a master plan to address development and infrastructure in a city that it forecasts will have a population of 1.8mn by 2031. Credai suggested additions to the plan, including the development of townships in the surrounding area to decongest the city centre. BMI believes that implementing this plan could pave the way for central commercial developments in Hyderabad, which would in turn aid employment for the citys growing population. The final draft of the plan is currently being finalised, with the final deadline for submitting suggestions on March 31 2012.
However, reports in January emerged that the Hyderabad Metropolitan Development Authority (HMDA) has entered 2012 struggling for finances. Auctions of land earlier in 2011 did not meet price expectations, adding to an already precarious financial situation for the authority. HMDA has had to delay a few projects, including the construction of its own office complex. There are currently no reports of a similar situation for GHMC, but this development does imply that both authorities could face the underlying risk of a lack of funding for government bodies.
Despite the concerns highlighted above, Hyderabad could be in the middle of a turnaround in fortunes. Growing urban infrastructure and a large talent pool are apparently marking the city out as an attractive investment prospect. According to JLL, IT growth and infrastructure projects like the Hyderabad Metro
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are expected to support increased residential and retail growth in particular. Recent price corrections and stalled projects are thought to be a short-term problem, as prices have bottomed out.
Bangalore Prices in Bangalore have been recovering more slowly since the global financial slowdown than in some of the other major Indian cities. But a number of factors have pushed demand and values up in the city recently. Firstly, the upcoming Bangalore Metro has experts forecasting increased investment along its route, for the development of residential and retail complexes. This could lead to an increase in existing property values, boosting the citys hitherto slower recovery. Secondly, increased retail demand throughout the country (matching its ever-growing population and urbanisation) will be common in Bangalore. The city is set to have the highest demand for mall space in India between 2011 and 2014.
Despite the current climate, in which many of Indias major cities are seeing demand outpacing supply and a slowdown in sales and construction, the overriding opinion of Bangalores commercial real estate market is that it is surprisingly buoyant. Although Bangalores price recovery after 2009 was slower than in other cities, the fall it suffered was not as severe and many reports are suggesting that Bangalores prices will rise steadily in 2012. Indeed, the city continues to be the preferred destination for investment from NRIs, the increase of which can only be a positive development.
Supporting this picture according to Indian Realty News, during 2011 Bangalore registered a healthy level of transactions and price increases, at a time when some of Indias other major cities were concerned with corrections. The city is reportedly targeted by end-users, rather than speculative investors or buyers, which has led to indications that it is one of the safest property markets in the country in 2012.
In particular, it appears Bangalores rental market has begun to grow, as moneycontrol.com reported on December 14 2011 that developers in the city are hoping to ensure constant revenue flow by focusing on leasing rather than sales. The report suggests that local players Prestige Estates, Nitesh Estates and Brigade Group are planning to boost rental income especially for retail property over the coming years.
On December 13, global investment banker Goldman Sachs began planning the development of 25 acres of land in Bangalores Outer Ring Road (ORR), in one of the citys biggest land deals of 2011. The land has office development potential of 230,000m2, and will be developed by Kalyan Developers. Development from such a major overseas player is likely to further boost Bangalores international profile as an IT hub, as evidenced by the fact that international consultant Infosys has also recently announced the development of space in the ORR.
Chennai In recent years, the residential sector in Chennai has had a major recovery. But it looks as if commercial
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space (particularly in non-IT sectors) is also picking up. A number of companies are aiming to upgrade their existing office space, prompting larger investments in top grade properties. Jones Lang LaSalle forecasts that almost 1.6mn m2 of office space will be added in Chennai by 2015.
Market recovery in Chennai is boosted by the fact that the city rebounded from the economic slowdown faster than any other market in India, as well as falling by less during the slowdown itself. The office market, which remains buoyant, seems to support the other commercial sectors in the city.
However, it appears as of early January 2012 that supply of high quality commercial space in Chennai is not sufficient to meet demand, which realtors claim is keeping rents in the city high. Construction in recent months has apparently focused more on the residential sector, leaving financial and retail premises in particular demand.
Perhaps as a result of this undersupply, potential changes have been discussed for Chennais real estate outlook since January. According to Credai, Chennais residential suburbs may expand upwards, with developers proposals involving office towers in those areas. No specific plan was mentioned in the report, but if allowed by the state government Chennai could see an increase in office supply spread throughout the city. As if to reinforce the potential for this change to come to light, developers are also requesting that multi-level car park facilities currently only permitted on commercial projects be allowed in residential areas. Depending on the outcome of these requests, Chennais commercial landscape could see a boost to bring it in line with growing residential demand.
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Real Estate Market Analysis Office

Supply And Demand
Cushman & Wakefield reported on January 5 2012 that absorption of office space in 2011 was up 8% on 2010, reaching 3.3mn m2. However, total new space brought online declined by 20% over the same period. In the short term this is a positive development, as existing vacant space is being utilised; particularly in light of Jones Lang LaSalles assessment that one-quarter of Indias office space lies vacant. While there is a clear disparity between the two figures, the implication that demand exceeds supply is the same. Despite 2011 seeing a decrease in the completion of new office space, take-up is clearly still not reaching the necessary level. At the same time, labour and steel costs have reportedly increased since September 2011, so developers have been reluctant to entice renters by lowering their rental levels.
Rents And Yields

Mumbai remains one of the countrys most desirable locations for investment, and our in-country sources have indicated that the south of the city is attracting the majority of tenants, forming a commercial epicentre. In early 2011, it was Mumbai that saw the largest drop in minimum rental levels, to INR269 per square metre (m2) per month from INR538 in mid-2010. Our latest round of in-country interviews conducted in December 2011 show that these levels then surged to an estimated INR700/m2 per month, causing year-onyear (y-o-y) growth of 30% by the end of 2011. At the same time maximum rental levels moved conversely; overall y-o-y growth was 2%, ending 2011 at INR3,850/m2 per month. But this growth does not take into account the whopping growth between late 2010 and early 2011, to INR5,380. Those levels clearly proved to be unsustainable, as evidenced by the drastic re-adjustment. This implies that early 2011 saw an optimism in the market where renters were looking to grade A property over that of lower quality that has since dissipated. However, it could also indicate that lower quality properties are undergoing improvements to increase their value, which may have increased demand in this area and reduced the unsustainable high prices at maximum levels.
Gurgaons office market has maintained a much more stable level of rents; between late 2010 and early 2011 there was a steady increase at both minimum and maximum levels, which our in-country sources estimated has remained stable throughout the year. However, Gurgaons grade A office rents remain lower than those of Mumbai, Hyderabad and Bangalore at INR960/m2 per month, so although the stability in the city shows promise, the other three cities clearly remain the more desirable. It also appears that Gurgaon is going to great lengths to attract new occupants, as developers in some properties are reportedly offering one to four rent-free months a year. This is in comparison with the other cities offering an average of only one rent-free month.
Aside from a minor adjustment going into 2011, Hyderabads maximum office rents have also remained stable, although growth has been minimal at just 3% y-o-y. Minimum rents, however, have dropped by almost 50% since the early part of the year, to an estimated INR280/m2 per month at the end of 2011. This implies
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that demand for lower quality property has dropped as renters hope to secure grade A premises for their businesses. Maximum rents were already the second highest of all the cities we surveyed (INR1,325 at the end of 2011), and the risk to developers of pricing themselves out of the market may explain why there has not been a proportionate increase despite the potential demand.
Maximum rent changes in Bangalore since early 2010 have been higher than in any other city we surveyed. Bangalore saw a maximum increase of 82% y-o-y, perhaps reflecting its status as an emerging location for investment. At an estimated INR1,290/m2 per month (from only INR710 in 2010), Bangalores top quality office space now only trails that of Mumbai and Hyderabad; both established commercial centres. Minimum levels have also grown, although at a much steadier rate of 12% y-o-y, implying that demand across the board in the city remains promising.
The picture in Chennai over 2011 was mostly bleak. Maximum rents actually increased between late 2010 and early 2011, to INR1,076/m2 per month, but dropped back so drastically by the end of the year that they posted an overall decline y-o-y. Minimum rents also dropped, although they remained stable across 2011. It would appear that there has been a corresponding drop in demand for office premises in the city, which could be a result of the more desirable property in cities with a better commercial reputation.
Rental yields are the ratio that shows yearly rental income as a percentage of the propertys sale value. In Mumbai, Gurgaon, Hyderabad and Bangalore our sources are forecasting a drop in yields in early 2012. For Mumbai in particular this means that as rents are predicted to surge at the top end, so could capital values, and by a greater margin. Once again, whether or not this increase will be sustainable is uncertain in the current investment climate. The other two cities yield decreases represent a more proportionate increase in values, but still shows that an adjustment could follow. Yields are then predicted to settle on a slight increase at the end of the year. They will remain at steady levels of around 10%, but it does imply some of the cities may see values decrease once more.
Table: Historic Office Rents, 2010-2011 (INR per m2/month)
2010 (Jul-Dec) Min Mumbai Gurgaon Hyderabad Bangalore Chennai 538.00 430.40 540.00 382.57 710.00 Max 3,766.00 860.80 1,290.00 710.00 820.00
2011 (Jan-Jun) Min 269.00 590.00 545.56 430.00 376.00 Max 5,380.00 960.00 1,324.54 1,290.00 1,076.00
2011 (Jul-Dec) Min 700.00 590.00 280.00 430.00 376.00 Max 3,850.00 960.00 1,324.54 1,290.00 646.00
% Change y-o-y
30%, 2% 37%, 12% -48%, 3% 12%, 82% -41%, -21%
Source: BMI
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Table: Net Office Yields, 2011-2012
2011 (Jan-Jun) Mumbai Gurgaon Hyderabad Bangalore Chennai 12-15% 9-10% 9-10% 10% 10-11%
2011 (Jul-Dec) 12-15% 9-10% 9-10% 10% 10-11%
2012 (Jan-Jun) 6-12% 8-10% 8-12% 6-10% 10-15%
2012 (Jul-Dec) 15% 10% 10-11% 10% 10-11%
Source: BMI
Table: Terms of Rental Contract/Lease, H211
Lease terms (in years) Mumbai Gurgaon Hyderabad Bangalore Chennai 2-5 1-3 3-5 2-9 1
Rent free months (if any) 1-2 months per contract 1-4 month per year 1 month per year 1 month per year 1 month per year
Source: BMI
Industry Forecast Scenario

Once again, our sources are forecasting a surge in maximum rents in Mumbai in early 2012, to INR7,700/m2 per month. If this is a repeat of 2011s pattern it may be that these levels are unsustainable, but currently we are predicting a minor increase in the second half of the year. The proposed international airport in Navi Mumbai is reportedly attracting investment, and may help to keep these levels high despite an apparent saturation in the south of the city. The predicted levels could also mean that the vast oversupply currently being reported in office space will catch up to Mumbai in the middle of the year, but that increased construction costs will keep developers from being able to lower their rents as a way of increasing demand.
Our in-country sources have identified Gurgaon as one of Indias fastest-growing cities, so comparative rent increases will continue to be high as it develops as a commercial hub. In fact, it is the only city predicted to see rental increases of more than 10% towards the end of 2012. Meanwhile, our prediction
Page 18
for Bangalore is that its office market is saturated, which currently goes against consensus. It could be that Bangalore will continue to see increased rents, but perhaps not at the expected level.
Yield forecasts show a stabilisation from 2012-2016. However, this will depend entirely on how stable rental levels remain in light of existing debt fears and oversupply of space.
Table: Forecast Office Rents, 2012 (INR per m2/month)
2012 (Jan-Jun) Min Mumbai Gurgaon Hyderabad Bangalore Chennai 800.00 700.00 280.00 430.00 379.00 Max 7,700.00 1,100.00 1,450.00 1,290.00 675.00
2012 (Jul-Dec) Trend Increase Increase Increase Increase Increase % Change 0-5% 3-20% 0-10% 0-5% 1-5%
Source: BMI
Table: Forecast Net Office Yields, 2008-2016
2008 Mumbai Gurgaon Hyderabad Bangalore Chennai 5-7% 4% 5% 6-7% 8-11%
2009 7-9% 4% 6% 6-12% 7-12%
2010 7-8% 6-11% 8-9% 6-9% 7-8%
2011e 12-15% 9-10% 9-10% 10% 10-11%
2012f 15% 10% 10-11% 10% 10-11%
2013f 15% 10% 10-11% 10% 10-11%
2014f 15% 10% 10-11% 10% 10-11%
2015f 15% 10% 10-11% 10% 10-11%
2015f 15% 10% 10-11% 10% 10-11%
2016f 15% 10% 11-11% 10% 11-11%
e/f = BMI estimate/forecasts. Source: BMI
Page 19
Real Estate Market Analysis Retail

Supply and Demand
In November 2011 the Indian government attempted to begin opening the countrys retail sector to foreign direct investment (FDI). However, this resulted in uproar, with protests arising from opposition parties. At the time of writing there had been no reports that a firm decision had been made, but it is clear that if the governments plans go ahead there could be a marked increase in retail investment and development from overseas. Ongoing corruption allegations may slow this process down considerably.
The potential for Indias retail market does not solely lie with the governments decision. Retail intelligence organisation Images Group hosted the East India Retail Summit (EIRS) 2012, in Kolkata on January 11-12. The theme of the summit was to present East India as the rising star of Indian retail, and was supported by multi-national brands including Coca-Cola and Future Group. The region reportedly holds more than 20% of the countrys total retail activity.
In another promising development CapitaMalls Asia, the retail unit of CapitaLand Ltd, has partnered with South Indian developer Prestige Group through its US$880mn CapitaRetail India Development Fund. The partnership is hoping to locate retail in Indias southern cities, in addition to CapitaMalls existing mall in Bangalore.
However, in late February 2012 Indian Realty News recorded that in some pockets of the country, where retail rents are on a par with cities in the US, the high rates are pricing retailers out of the market. Many international players see India as such a lucrative market that they will increase their rental budgets, but their low rent-to-revenue ratio is causing problems justifying the added expense. Premium retailers are competing over limited space (in prime areas like Linking Road, Mumbai) which serves to keep rents high. The situation slows the rate of expansion, which may stymie the fledgling organised retail market.
Some smaller cities, conversely, are seeing low demand and corresponding low rents in shopping malls (perhaps as retailers concentrate on vying for prime space rather than spreading geographically). As a result, developers of these malls have begun converting the space into office or residential property. In addition, Crisil Research predicts that of 8.9mn m2 added retail space between 2011 and 2013, demand will only exist for 3.2mn m2, or approximately 36%. This would cause a sharp fall in rental rates as developers became less able to find occupants for their existing retail premises.
As a result of this oversupply, RMZ Corporation has converted its Bangalore shopping mall plan into one for luxury housing, while Parsvnath Developers has shelved five retail projects. Many of Indias other real estate majors, such as Sobha Developers, Phoenix Mills and Entertainment World Developers, are either
Page 20
redesigning (with a heavier focus on residential space) or stalling their existing projects. This situation could result in a protracted slowdown in development while constructors must wait for demand to surpass supply.
Rents and Yields

Retail rents, which have been higher than their corresponding levels in the office sub-sector, are expected to continue on this route as a result of the increase in demand that retailers are currently displaying in Indian cities. However, the retail sub-sector has seen more of a decrease in rents over 2011. Rates are currently considerably higher in Mumbai and Gurgaon than in the other three cities we analyse, although Mumbai is the only city also displaying high minimum levels (remaining around INR2,000/m2 per month since 2010). Due to the nature of retail in India, it will be common for lower quality property to command much lower rents than top quality premises.
Bangalore and Chennais retail rents have suffered across 2011. Our latest interviews suggest Bangalores maximum levels have seen a particularly worrying drop of 55% y-o-y, from INR4,820/m2 per month in 2010 to INR2,152 in 2011. At the top end, Bangalores retail rents are still higher than those in Hyderabad, but at current levels this is unlikely to last.
In a similar pattern to office rents, it is Gurgaon that our sources have identified as showing the most resilience. Maximum rents grew by 100%, reaching INR5,380/m2 per month at the end of 2011 and surpassing those levels mentioned in Bangalore by some margin. Every city, however, has seen rents drop at the minimum end. For Bangalore and Chennai this seems to reflect an overall decrease in demand, but for the other three cities it could be indicative of a general desire for retailers to acquire better quality premises.
At some level, yields in every city except Chennai are expected to decrease over the first half of 2012. This reflects our prediction for higher quality to take precedence, as it means that values will increase more than rents. For Bangalore, whose retail rents have decreased, the corresponding decrease in rents implies that values are continuing to grow, albeit more slowly than the other cities. It is perhaps the sales market that is boosting the cities outlook, and supporting the optimistic reports we have highlighted for Bangalore (see Market Overview). In Chennai we forecast a short-term increase in yields in early 2012, which once more means that values will be decreasing as rents have done the same.
Page 21
Table: Historic Retail Rents, 2010-2011 (INR per m2/month)
2010 (Jul-Dec) Min Mumbai Gurgaon Hyderabad Bangalore Chennai 2,152.00 1,076.00 1,076.00 948.50 669.00 Max 5,918.00 2,690.00 1,291.20 4,820.48 1,530.00
2011 (Jan-Jun) Min 2,000.00 750.00 1,145.40 645.00 376.00 Max 5,380.00 5,380.00 1,353.24 2,152.00 1,600.00
2011 (Jul-Dec) Min 2,000.00 750.00 750.00 645.00 476.00 Max 8,070.00 5,380.00 1,614.00 2,152.00 1,510.00
% Change y-o-y
-7%, 36% -30%, 100% -30%, 25% -32%, -55% 29%, -1%
Source: BMI
Table: Net Retail Yields, 2011-2012
2011 (Jul-Dec) 12-15% 10-15% 9-10% 10% 10-11%
2012 (Jan-Jun) 6-12% 8-15% 8-12% 6-10% 10-15%
2012 (Jul-Dec) 12-15% 10-15% 10-11% 10% 10-11%
Source: BMI
Lease terms(in years) Mumbai Gurgaon Hyderabad Bangalore Chennai 2-5 3-5 5 3 3-5
Rent free months(if any) 1-2 months per contract 1-3 months per year 1 month per year 1 month per year 1 month per year
Source: BMI
Page 22

In early 2012, only slight rental adjustments are expected from the end of 2011. Hyderabad and Bangalore are expected to remain stable while we predict slight increases in Mumbai, Gurgaon (at minimum levels only) and Chennai (at both ends of the scale). While Chennai exhibits less overall demand than the other four cities, this stability implies that the status quo will be maintained and a subdued demand will continue. In the second half of the year the growth expected in Gurgaon is much more subdued than our forecasts for the office market. But it is the retail sub-sector in which we have recorded the worst cases of oversupply, and it appears that no city will see increases of much more than 5%.
As with the office market, retail yields at the end of 2012 are expected to settle at their higher levels (with the exception of Chennai, where levels will settle following their slight increase). Mumbai will see the highest yields, although this does not necessarily mean that the city has lower values. Because retail rents in Mumbai are considerably higher than in the other cities at present, the higher yields seem to hint at a more consistent picture for values across the country. Between 2012 and 2016 we currently forecast that yields will retain stability; if rents continue to increase this will simply mean that values are moving in tandem.
Table: Forecast Retail Rents, 2012 (INR per m2/month)
2012 (Jan-Jun) Min Mumbai Gurgaon Hyderabad Bangalore Chennai 2,100.00 780.00 750.00 645.00 480.00 Max 8,070.00 5,380.00 1,614.00 2,152.00 1,580.00
Source: BMI
Page 23
Table: Forecast Net Retail Yields, 2008-2016
2008 Mumbai Gurgaon Hyderabad Bangalore Chennai 9-12 5% 5% 3-6% 11%
2009 7.5-8% 5% 7% 6-7% 11%
2010 3-4% 8-12% 8-9% 7-8% 11%
2011e 12-15% 10-15% 9-10% 10% 10-11%
2012f 12-15% 10-15% 10-11% 10% 10-11%
2013f 12-15% 10-15% 10-11% 10% 10-11%
2014f 12-15% 10-15% 10-11% 10% 10-11%
2015f 12-15% 10-15% 10-11% 10% 10-11%
2015f 12-15% 10 -15% 10-11% 10% 10-11%
2016f 12-15% 10-15% 11-11% 10% 11-11%
Table: India Retail Sales Indicators, 2008-2016
2008 Retail sales (INRbn) Retail sales (US$bn, fixed 2008 FX rate) Retail sales (US$bn, forecast FX rates) Retail sales as % GDP Retail sales per capita (INR) Retail sales per capita (US$) Total retail sales growth (INR) Per capita retail sales growth (INR) Private final consumption (INRbn) Private final consumption (US$bn) Private final consumption (INR, real growth % y-o-y)
13,730.9
2009
15,500.5
2010
17,934.3
2011e
20,248.2
2012f
22,571.1
2013f
25,233.4
2014f
28,012.1
2015f
31,134.1
2016f
28,012.1
298.09
328.16
386.52
421.84
490.68
600.79
709.17
808.68
746.99
298.09 26.0
336.51 25.3
389.35 24.5
439.58 23.9
490.01 23.3
547.81 22.7
608.13 22.2
675.91 21.8
608.13 17.4
11,530
12,834
14,645
16,310
17,937
19,789
21,685
23,799
21,150
250
272
316
340
390
471
549
618
564
10.6
12.9
15.7
12.9
11.5
11.8
11.0
11.1
-10.0
9.0
11.3
14.1
11.4
10.0
10.3
9.6
9.7
-11.1
32,578
37,820
45,030
51,884
58,765
66,652
74,883
84,131
94,521
707
801
989
1,140
1,274
1,431
1,673
1,971
2,320
15
16
19
15
13
13
12
12
12
e/f = BMI estimate/forecast. Source: UN data, Household consumption of food & drink, Alcohol & narcotics, Clothing & footwear and household goods & furnishings are used
Page 24
Real Estate Market Analysis Industrial

Supply and Demand
In early January 2012, Delhi State Industrial and Infrastructure Development Corporation (DSIIDC), the Delhi governments primary infrastructure agency, began the groundwork for an industrial park in the south west of the city. At a cost of INR12bn, the 77-acre facility to be called Knowledge Park is hoped to bring direct employment to 100,000 people. The development implies that demand for high quality industrial space is increasing, and there is hope that a site like this in the countrys capital could boost the way industrial property is viewed in Indias other major cities.
Rents and Yields

Industrial rents are traditionally the lowest of all three sub-sectors. Once again, Mumbai unsurprisingly commands the greatest rental levels for industrial space, although there has been no increase in industrial rents over the last 18 months in the city. Unlike with office and retail property it is Gurgaon that has seen the biggest decline in industrial rents (of up to 62% y-o-y). At the maximum end in particular, Gurgaons retail rents have dropped from INR860/m2 per month in late 2010 to just INR325 by mid-2011.
Hyderabad and Bangalore, conversely, have had steady increases in their industrial rents (although minimum levels in Bangalore experienced a very slight decrease). This could reflect their positions as increasingly desirable for other sectors, which would necessitate an increase in local industrial space. In fact, aside from Mumbai the obvious front-runner it is Bangalore that now commands the highest maximum industrial rents, at INR500/m2 per month. This could bolster the citys seemingly unfortunate position in the other two sub-sectors (although as we have assessed, the purchase market in the city is holding up better). Bangalore also currently offers the most rent-free months in a year, in some cases up to six months. This could be a tactic on the part of developers to entice occupants in spite of the increased rent prices.
Chennais industrial market also seems much more optimistic than its office or retail outlook. Although growth was minimal (rents at the end of 2011 were estimated at INR250/m2 per month) it shows stability in this sector that could see the city through the long term.
As with the other sub-sectors, yields in the industrial market are expected to drop a little in early 2012. It could be that buyers hopes for a more optimistic market in the new year will feed an increase in demand that will cause values to temporarily shoot up. Mumbai will see the most drastic drop in yields, although since levels are expected to re-adjust by the end of 2012 this could mean there is a sharper decrease in values, which in turn may lead to temporary growth in demand.
Page 25
Table: Historic Industrial Rents, 2010-2011 (INR per m2/month)
2010 (Jul-Dec) Min Mumbai Gurgaon Hyderabad Bangalore Chennai na 269.00 69.94 185.61 107.60 Max na 860.00 108.00 247.48 215.20
2011 (Jan-Jun) Min 300.00 200.00 73.25 170.46 107.60 Max 1,500.00 325.00 120.56 500.00 215.20
2011 (Jul-Dec) Min 300.00 200.00 73.25 170.46 107.60 Max 1,500.00 325.00 120.56 500.00 250.00
% Change y-o-y
na -26%, -62% 5%, 12% -8%, 102% 0%, 16%
na = not available/applicable. Source: BMI
Table: Net Industrial Yields, 2011-2012
2011 (Jul-Dec) 12-15% 5-7% 7-8% 8% 10-12%
2012 (Jan-Jun) 6-10% 5-7% 6-9% 6-8% 10-15%
2012 (Jul-Dec) 12-15% 5-7% 8-9% 8% 10-12%
Source: BMI
Lease terms (in years) Mumbai Gurgaon Hyderabad Bangalore Chennai 3-5 3-9 1-10 3-5 3-9
Rent free months (if any) 1-2 months per contract 1-3 month per year 1 month per year 3-6 months per year 1 month per year
Source: BMI
Page 26

The industrial sector is currently the only one in which our sources predict increases for every city in the first half of 2012. While these are only slight, it shows that this market is less affected by potential debt fears or oversupply, and is remaining stable. This outlook remains the same for the latter part of the year, during which Chennai is expected to see the largest rent increases of between 3% and 10%. The minimal growth does highlight the subdued nature of the market, but we recognise that in the current climate it is important to simply stave off a decline in rents. In Hyderabad, our sources have implied that demand exceeds supply in the industrial sector, and the Greater Hyderabad region provides an excellent expansion opportunity to cater to it. However, there is also an apparent risk that by 2014 this could lead to a severe oversupply of industrial space in the city.
The slight change in values in early 2012 is expected to settle by the end of the year, except in Chennai where yield levels will actually lower slightly. The industrial market is clearly the most promising for Chennai at present, and this change implies a slight increase in values that will outshine the increase expected in rents. Through to 2016 we once again expect yields to settle, which if rents move as expected will simply mean that the market is stable and values are increasing at the same rate.
Table: Forecast Industrial Rents, 2012 (INR per m2/month)
2012 (Jan-Jun) Min Mumbai Gurgaon Hyderabad Bangalore Chennai Source: BMI 320.00 215.00 78.00 174.00 115.00 Max 1,565.00 340.00 210.00 500.00 260.00
Table: Forecast Net Yield, 2008-2016
2008 Mumbai Gurgaon Hyderabad Bangalore Chennai 9-12% 5% 6% 3-6% 10%
2009 7-8% 4% 7% 6-7% 10%
2010 3-4% 10-15% 6-7% 7-8% 6-10%
2011e 12-15% 5 -7% 7-8% 8% 10-12%
2012f 12-15% 5-7% 8-9% 8% 10-12%
2013f 12-15% 5-7% 8-9% 8% 10-12%
2014f 12-15% 5-7% 8-9% 8% 10-12%
2015f 12-15% 5-7% 8-9% 8% 10-12%
2015f 12-15% 5-7% 8-9% 8% 10-12%
2016f 13-15% 6-7% 9% 8% 11-12%
Page 27
Construction And Infrastructure Outlook

Table: India Construction And Infrastructure Industry Data
2008/09 Construction Industry Value, INRbn Construction Industry Value, US$bn Construction Industry Real Growth, % chg y-o-y Construction Industry, % of GDP
2009/10
2010/11
2011/12f
2012/13f
2013/14f
2014/15f
2015/16f
2016/17f
4,514.1
5,017.1
5,918.6
6,680.8
7,711.1
8,851.0
10,085.2
11,364
12,743
103.7
103.6
129.5
143.2
159.0
188.3
222.9
262.8
310.8
5.4
7.0
8.1
4.0
7.2
8.5
8.9
7.7
7.1
8.5
8.2
8.1
7.9
7.9
8.0
8.0
8.0
7.9
Total Capital Investment, INRbn Total Capital Investment, US$bn Total Capital Investment, % of GDP Capital Investment Per Capita, US$ Real Capital Investment Growth, % y-o-y Infrastructure Industry Value As % of Total Construction Infrastructure Industry Value, INRbn Infrastructure Industry Value, US$bn Infrastructure Industry Value Real Growth, % chg y-o-y Infrastructure Industry Value as % of GDP
17,888.0
20,161
23,221.0
26,780.3
30,803
36,157
42,521.7
48,666
55,442
388.3
426.8
510.1
588.2
667.8
776.5
950.2
1,140.1
1,360.6
33.9
32.9
31.8
31.6
31.7
32.6
33.7
34.1
34.5
326.1
353.4
416.5
473.8
530.7
609.0
735.6
871.5
1,027.3
1.5
8.0
6.9
6.0
7.8
11.0
12.0
9.0
8.5
45.7
46.5
47.0
47.4
48.0
49.1
49.6
50.1
50.5
2,063.3
2,332.9
2,781.8
3,165.2
3,703.3
4,346.2
5,005.7
5,692.9
6,432.5
47.4
48.2
60.8
67.8
76.4
92.5
110.6
131.6
156.9
12.8
11.1
8.7
4.9
8.8
11.1
10.2
8.7
8.0
3.9
3.8
3.8
3.7
3.8
3.9
4.0
4.0
4.0
Page 28
2008/09 Residential and Non-Residential Building Industry Value As % of Total Construction Residential and Non-Residential Building Industry Value, INRbn Residential and Non-Residential Building Industry Value, US$bn Residential and Non-Residential Building Industry Value Real Growth, % chg y-o-y Residential and Non-Residential Building Industry Value as % of GDP
2009/10
2010/11
2011/12f
2012/13f
2013/14f
2014/15f
2015/16f
2016/17f
54.3
53.5
53.0
52.6
52.0
50.9
50.4
49.9
49.5
2,450.9
2,684.1
3,136.9
3,515.6
4,007.8
4,504.8
5,079.5
5,672.0
6,310.6
56.3
55.4
68.6
75.3
82.6
95.8
112.3
131.1
153.9
-2.5
7.5
6.3
3.2
5.8
6.2
7.8
6.7
6.3
4.6
4.4
4.3
4.1
4.1
4.1
4.0
4.0
3.9
f = BMI forecasts. Sources: Reserve Bank of India/ILO
2013/14f Construction Industry Value, INRbn Construction Industry Value, US$bn Construction Industry Real Growth, % chg y-o-y Construction Industry, % of GDP 8,851.0 188.3
2014/15f 10,085 222.9
2015/16f 11,364 262.8
2016/17f 12,743 310.8
2017/18f 14,226 355.7
2018/19f 15,891 397.3
2019/20f 17,714 442.9
2020/21f 19,650 491.3
2021/22f 21,796 544.9
8.5 8.0
8.9 8.0
7.7 8.0
7.1 7.9
6.6 7.8
6.7 7.8
6.5 7.7
5.9 7.6
5.9 7.5
Total Capital Investment, INRbn Total Capital Investment, US$bn
36,157
42,521
48,666
55,442
62,639
70,506
79,214
88,581
99,056
776.5
950.2
1,140.1
1,360.6
1,566.0
1,762.7
1,980.4
2,214.5
2,476.4
Page 29
2013/14f Total Capital Investment, % of GDP Capital Investment Per Capita, US$ Real Capital Investment Growth, % chg y-o-y Infrastructure Industry Value As % of Total Construction Infrastructure Industry Value, INRbn Infrastructure Industry Value, US$bn Infrastructure Industry Value Real Growth, % chg y-o-y Infrastructure Industry Value as % of GDP
2014/15f
2015/16f
2016/17f
2017/18f
2018/19f
2019/20f
2020/21f
2021/22f
32.6
33.7
34.1
34.5
34.5
34.5
34.4
34.2
34.0
609.0
735.6
871.5
1,027.3
1,168.3
1,299.7
1,443.8
1,596.7
1,766.5
11.0
12.0
9.0
8.5
7.6
7.2
7.0
6.5
6.5
49.1 4,346.2 92.5
49.6 5,005.7 110.6
50.1 5,692.9 131.6
50.5 6,432.5 156.9
50.8 7,229.1 180.7
51.1 8,120.9 203.0
51.3 9,095.1 227.4
51.5 10,126 253.2
51.7 11,266 281.7
11.1 3.9
10.2 4.0
8.7 4.0
8.0 4.0
7.4 4.0
7.3 4.0
7.0 4.0
6.3 3.9
6.3 3.9
Residential and NonResidential Building Industry Value As % of Total Construction Residential and NonResidential Building Industry Value, INRbn Residential and NonResidential Building Industry Value, US$bn Residential and NonResidential Building Industry Value Real Growth, % chg y-o-y Residential and NonResidential Building Industry Value as % of GDP
50.9
50.4
49.9
49.5
49.2
48.9
48.7
48.5
48.3
4,504.8
5,079.5
5,672.0
6,310.6
6,997.8
7,770.6
8,619.6
9,524.7
10,530
95.8
112.3
131.1
153.9
174.9
194.3
215.5
238.1
263.3
6.2
7.8
6.7
6.3
5.9
6.0
5.9
5.5
5.6
4.1
4.0
4.0
3.9
3.9
3.8
3.7
3.7
3.6
f = BMI forecasts. Sources: Reserve Bank of India/ILO
Page 30
Construction and Infrastructure Forecast Scenario

BMI View: Statistical data shows that construction and infrastructure activity in India remained weak through the first nine months of FY2011/12 (April-March), justifying our view of a prolonged soft patch for the Indian construction sector in FY2011/12. Going into FY2012/13, however, we believe that the sector's fortunes will start to improve, with monetary conditions providing an additional tailwind for the 12th Five-Year Plan. We are forecasting real growth for the construction sector to reach 7.2% in FY2012/13 and average 8.1% between FY2013/14 and FY2016/17.
f= BMI forecast, Source: BMI, BMI Calculation
Infrastructure Moving Centre Stage Construction Industry Value And Infrastructure Share
Construction activity within India has surprised on the upside in the second quarter of FY2011/12 (JulySeptember). The latest statistical data from India's Ministry of Statistics and Programme Implementation (MOSPI) showed that real growth for the Indian construction industry came in at 4.3% year-on-year (y-oy) in Q2 FY2011/12, compared to 1.2% y-o-y in Q1 FY2011/12. Nevertheless, the pace of construction activity has slowed compared to the same period in FY2010/11 (6.7% y-o-y in Q2 FY2010/11).
For the rest of FY2011/12, we continue to maintain our view of a prolonged soft patch for the Indian construction sector, with real growth forecast to reach 4.0% in FY2011/12. The latest government data showed that India's Infrastructure sector output (a component of the construction sector) grew by just 4.4% y-o-y in the first nine months of FY2011/12, lower than the annual growth of 5.7% in the same period in FY2010/11.
We believe that this was primarily due to the adverse monetary conditions in India, where the combination of costly debt levels and high raw material prices deterred or prevented construction companies operating in India from carrying out large-scale projects due to a lack of adequate financing. Inflation averaged at an elevated 9.4% y-o-y between April and December 2011, while interest rates were
Page 31
raised aggressively by the Reserve Bank of India (RBI) to combat inflation. Between April and December 2011, the policy repo rate rose by 175 basis points to reach 8.50% in December 2011.
Monetary Conditions To Improve

India - Policy Rate, % & Headline WPI, % y-o-y (LHS); Quarterly Construction Industry Value Real Growth, % chg y-o-y (RHS)
Note: Quarterly Construction Figures Based On Calendar Year. Source: Ministry of Statistics and Programme Implementation, Reserve Bank of India, BMI
However, we do remain convinced that this cyclical downtrend in construction has bottomed out, with disinflationary pressures to provide scope for an improvement in construction activity going forward. We have already seen inflation decline precipitously in Q3 2011/12 (October-December), falling from its peak of 10.0% y-o-y in September 2011 to 7.5% y-o-y in December 2011. This is likely to provide some leeway for the RBI to pursue an expansionary monetary policy and we are projecting at least 75bps worth of rate cuts throughout FY2012/13, bringing the repo rate to 7.75%.
Activity On Course For A Rebound
Going into FY2012/13, we are confident that the sector's fortunes will start to improve. The Indian government is making serious attempts to kick-start infrastructure development for the 12th Five-Year Plan (FY2012/13-FY2016/17). It has continued to approve major infrastructure projects and push forward plans to accelerate and enhance the flow of long-term financing for infrastructure projects.
In December 2011, the India Infrastructure Finance Company Limited (IIFCL) announced plans to join forces with a group of private banks to launch a US$1bn infrastructure debt fund (IDF) by the end of February 2012. The fund, which was approved by the Indian Finance Ministry on December 3 2011,
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would be led by IIFCL and co-sponsored by a combination of foreign banks - HSBC , the Asian Development Bank (ADB) - and local banks - IDBI Bank and Life Insurance Corporation of India (LIC).
To See A Rebound
Construction Industry Value (sum) And Its Components, Real Growth, % chg y-o-y
f= BMI forecast. Source: Reserve Bank of India, BMI
In addition, IIFCL and LIC had signed a memorandum of understanding (MoU) with seven public sector banks to create a consortium to jointly provide financial assistance to infrastructure projects in India. IIFCL is expected to fund up to 20% of any of the projects financed by the consortium, allowing infrastructure projects to reach financial closure at a faster pace.
The Indian government had also initiated a new stimulus plan in January 2012, requiring 17 state-owned companies to utilise their reserves to invest in infrastructure and energy assets in FY2012/13. The plan opens up a considerable new source of capital for India's infrastructure sector (approximately US$35bn) and could address the government's lack of fiscal ability to increase infrastructure spending.
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Not Ideal For Infrastructure Financing

India - Total Domestic Debt Outstanding, % of GDP (LHS) And Maturity Pattern Of Deposits Of Scheduled Commercial Banks, % of Total
Source: BMI, Bank For International Settlements (June 2011), Reserve Bank Of India, Basic Statistical Returns of Scheduled Commercial Banks in India, Volumes 37-39
Boosting The Pipeline
Besides greater access to financing, another indication of a rebound in construction activity is the growing number of infrastructure projects being implemented and announced by the Indian government. The road sector is a key example of this increase in project pipeline. Under India's 12th Five-Year Plan, the Road Transport Ministry is planning to release US$120bn worth of road-widening projects with a total length of 55,000km, while data from BMI 's key projects database shows that around US$50bn around US$50bn worth of roads projects being planned or under construction. This large pipeline of projects is expected to allow the ministry to reach its much touted target of constructing more than 20km of roads per day throughout the Five-Year Plan.
Besides road infrastructure, India is planning to release power projects totalling 76,000-megawatt in the 12th Five-Year plan and develop six high-speed railway lines over the coming years. We expected several of these projects to be awarded at the start of FY2012/13 and to begin construction in late-2012 or 2013. This would boost infrastructure activity, allowing the sector to remain as the main driver of construction industry value over the coming years (infrastructure represents one of the two sub-sectors that form the construction industry value, according to BMI's definition). This robust activity in infrastructure is reflected in our forecasts, with real growth for India's infrastructure and construction sectors expected to average 9.4% and 7.9% and per annum between 2012/13 and 2016/17, respectively.
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Vast Opportunities In Roads

India - Award Of Road Orders, km per day (LHS); Roads And Bridges Infrastructure Industry Value Data (RHS)
*NHAI estimations, f = BMI forecast. Source: BMI, Reserve Bank of India, NHAI, Planning Commission
Risks Remain In Reforms Having said that, we believe that the success of the 12th Five-Year Plan is still dependent on the level of regulatory reforms carried out by the government to facilitate infrastructure development. Structural weaknesses in India's business environment remain considerable and could still significantly delay projects that have reached financial closure. This is emphatically highlighted in the port sub-sector. The Indian government is expected to award no more than 4-5 port projects for FY2011/12, far short of its original target of 23-24 ports projects. This is primarily due to red tape, where bureaucratic ineptitude and convoluted regulations within the sector have led to delays in completing land acquisition, as well as environmental and security clearances. The sector also suffers from strict cabotage rules, which potentially deter international shipping lines from investing in Indian ports as they prefer to use their own feeder lines. We believe that these business environment difficulties are unlikely to be resolved over the short-term and as such, we have revised down our growth prospects for the sector, with real growth forecast to average 7.5% per annum between 2012/13 and 2016/17 (previously 9.1%).
Besides the port sub-sector, other large-scale residential and non-residential building construction projects such as the US$31bn Lavasa township (developed by Hindustan Construction Co) and the US$12bn steel plant in Orissa (developed by POSCO ) are also facing delays due to environmental and land clearance issues. Although a new land bill is supposed to be approved in FY2011/12 and bring muchneeded speed and clarity to the land acquisition process, we have yet to see it be implemented. With the July 2012 elections looming, the land reform bill could face delays as it remains a hot political topic, with the Indian public still very much against the bill.
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Steeped In BE Risks
India Ports Harbours and Waterways Infrastructure Industry Real Growth, Old And New Forecasts, % chg y-o-y
e/f = BMI estimate/forecast. Source: Reserve Bank of India, BMI
Land Bill Crucial

India Outstanding Infrastructure Projects (INR1.5bn And Above) By Sector, October 2011
Source: BMI, Ministry of Statistics and Programme Implementation
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(Note: Over Q2 2010 we aligned our data with the Indian standard of using financial year from April 1 to March 31. Furthermore, in Q111 we extended our forecasts to FY2020/21. This brings infrastructure data in line with BMIs country risk team, which also uses the financial year rather than the calendar year.)
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Macroeconomic Outlook
An Economic Resurgence Or The Calm Before The Storm?
BMI View: Despite encouraging Purchasing Managers' Index data, we continue to believe that real GDP growth will come in at a three-year low of 6.8% in FY2011/12 (April-March), with Q4 FY2011/12 likely to disappoint. Aside from this single indicator, most trends (including collapsing export growth and slowing credit expansion) also paint a dreary picture of the Indian economy. We expect activity to recover somewhat in FY2012/13 (with our full-year growth forecast currently at 7.3%) as the central bank starts to cut its policy rates, which have essentially choked the Indian economy over the past year.
Macro Strategy Following the recent release of fairly positive economic indicators, we are considering the possibility that the Indian economy will escape a sharp slowdown in the final quarter of this fiscal year. Recent purchasing managers' indices (PMI) suggest a small rebound in overall economic activity. Manufacturing PMI has risen from its September low of 50.4 to 54.2 in December a six-month high. Similarly, its services counterpart has climbed to the same level of 54.2 in December, from the low of 49.1 recorded in October. These latest figures have led us to reassess our 6.8% real GDP growth projection for the ongoing fiscal year FY2011/12 (April-March).
Mixed Signals
India Purchasing Managers' Index (LHS) & Commercial Credit & Industrial Production, % chg y-o-y (RHS)
Source: BMI, HSBC Having said that, we are choosing not to waiver from our current near-term growth projections. We still expect FY2011/12 GDP growth to come in at 6.8% (with Q4 FY2011/12 likely to disappoint), and are forecasting growth to rebound in FY2012/13 to reach 7.3%. For clarity, our 6.8% forecast implies a
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continued slowdown through H2 FY2011/12 (Q311 to Q112), with growth slowing to 6.4% year-on-year (y-o-y) in H2 (from 7.3% in H1). While the latest PMI readings have undoubtedly been encouraging, we believe that they do not paint a complete picture of the current state of the economy.
Most macroeconomic trends still suggest a weak, if not weakening, economy. Although national accounts for Q3 FY2011/12 (Q411) have yet to be released, the quarter started out extremely poorly. Industrial production (IP) sharply contracted for the first time on a year-on-year basis since June 2009, with all components from consumer to capital goods recording negative growth in October. More recently, export growth has undergone a spectacular collapse. November's trade data showed growth falling to a mere 3.9% y-o-y, down markedly from the 81.8% high in July. Finally, commercial credit growth, which has been on a sustained downtrend since the beginning of 2011, fell to 13.4% y-o-y in December 2011 a level not seen since December 2009.
As such, despite the PMI bounce, we are keeping to our core assumptions previously fleshed out following the release of Q2 FY2011/12 GDP data (see our online service, December 1 2011, 'Downturn Intensifies, Outlook Worse Than 2008'). In short, until the Reserve Bank of India (RBI) loosens its official stance on monetary policy, which we do not see happening until Q212 at the earliest, consumption and investment activity are likely to remain weak. Furthermore, we do not see the country exporting its way out of this ongoing downturn, nor is the government in a position to enact stimulative fiscal measures.
Consumers Still Squeezed

India Inflation & RBI Repo Rate, % chg y-o-y (LHS) & Consumer Goods IP & Private Consumption, % chg y-o-y (RHS)
Source: BMI, Reserve Bank of India, Ministry of Statistics and Programme Implementation (India), Ministry of Commerce and Industry (India)
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Expenditure Breakdown
Private Consumption Outlook With cost pressure still placing a heavy burden on household budgets, we are maintaining our downbeat outlook on private consumption activity, which makes up just under two thirds of GDP. Although headline wholesale price inflation moderated through October and November, it remains at historically elevated levels. The headline figure came in at 9.1% y-o-y in November (down from 9.7% in the previous month), a few percentage points above the 7.0% average over the past five years. In addition, the cost of credit remains high, with the RBI keeping its policy rates on hold (a 8.50% repo rate) since it last hiked rates in October. Adding further pressure on the Indian consumer, declining asset prices have done little to restore any semblance of confidence. The benchmark Bombay Stock Exchange India Sensitive Index (SENSEX) has been on a sustained downtrend since peaking in November 2010, having fallen 25.1% to current levels. More recently, the drop in the value of the rupee (which has weakened by 19.7% since its July peak) would have led to a significant deterioration of household purchasing power. At the moment, we are pencilling private consumption to grow by 6.0% and 6.2% in FY2011/12 and FY2012/13 respectively, implying a considerable slowdown from the 8.8% expansion achieved in FY2010/11.
No Room For Stimulus

India Government Finance, 6mma % chg y-o-y
Source: BMI, Ministry of Finance (India) Public Consumption As previously mentioned, we do not believe that the government is in a position to enact any sort of fiscal support to provide a boost to the Indian economy. We reiterate that, in contrast to the four quarters following the global financial crisis in 2008, when government spending averaged 26.7% y-o-y growth, spending over the past four quarters has only expanded at an average clip of 3.2%. Negative revenue
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growth, coupled with an expenditure bill growing at double-digit rates (see chart) suggests to us minimal, if any, fiscal room to push through stimulative measures. Indeed, the cumulative budget deficit for the first eight months of FY2011/12 is already 89.5% wider than in the same period in the previous fiscal year. With sovereign creditworthiness a key global concern at present, the government will not want to give investors another reason to shy away from the Indian growth story. We are projecting public consumption to grow by 3.0% and 5.0% in the ongoing and upcoming fiscal years respectively.
In The Red For The Time Being

India Capital Goods IP, % chg y-o-y (LHS) & Gross-Fixed Capital Formation, % chg y-o-y (RHS)
Source: BMI, Ministry of Statistics and Programme Implementation (India) Gross Fixed Capital Formation Compared to consumption activity, investment expenditure has suffered much more from the high cost of credit. Capital goods industrial production (IP) showed a staggering 25.5% y-o-y contraction in October the largest contraction ever recorded in the 2004/05 series of IP data. With credit costs expected to remain elevated (at least until the end of the current fiscal year), the ongoing downturn in investment spending is unlikely to find a reprieve. Furthermore, the largely unproductive winter session of parliament will do little to instil investor confidence. In particular, we highlight the government's rapid reversal on its early decision to allow foreign direct investment into multi-brand retail. As such, it is unsurprising that business confidence started to edge lower in H211 after gradually picking up from 2009. For FY2011/12, we are projecting gross fixed capital formation growth to slow to 6.0% (from 6.9% in the previous fiscal year), before recovering to 7.8% in FY2012/13.
Net Exports To the chagrin of India's export sector, global demand conditions will most likely deteriorate through 2012. Our latest global assumptions update (see 'Global Assumptions Q1 2012 Update', December 19
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2011) sees world GDP growth slowing to 2.8% this year, from 3.1% in 2011; US growth remaining lacklustre; the eurozone entering recession; and a hard landing in China. While export growth (in real terms) held up extremely well as domestic economic activity continued to slump over the past few quarters, we firmly believe that H2 FY2011/12 GDP numbers will start to fully reflect the recent downturn in monthly export growth (see chart). Overall, we continue to expect net exports to contract, with growth coming in at -6.0% and -3.6% in FY2011/12 and FY2012/13 respectively.
'Real' Weakness To Show

India Exports
Source: BMI, Ministry of Commerce and Industry (India), Ministry of Statistics and Programme Implementation (India)
RBI Easing: The Catalyst In FY2012/13 As FY2012/13 approaches, we highlight what is perhaps the key catalyst for an economic bounce in the coming fiscal year. Essentially, we are keeping a close watch on the RBI and the increasing likelihood that it will start to cut its policy rates in order to provide the domestically driven economy a much-needed monetary policy boost. At the moment, we are expecting 75 basis points worth of interest rate cuts through FY2012/13 as wholesale price inflation moderates from its current high-single-digit levels to 6.5% by end-FY2012/13. We are not ruling out the possibility of more cuts should headline inflationary risks recede faster than expected.
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Table: India Economic Activity
2012f Nominal GDP, INRbn Nominal GDP, US$bn Real GDP growth, % 2,4 change y-o-y GDP per capita, US$ Population, mn
5 4 1,4 2,4
2013f 118,401.2 2,620.2 7.8 2,055 1,275.1 7.5
2014f 133,486.1 3,108.8 7.7 2,407 1,291.8 7.9
2015f 150,232.6 3,669.8 7.5 2,805 1,308.2 7.6

2
2016f 168,945.7 4,223.6 7.5 3,189 1,324.4 7.5
2017f 189,900.4 4,747.5 7.4 3,542 1,340.4 7.5
104,241.3 2,287.6 7.3 1,818 1,258.4 0.0
Industrial production 3,4 index, % y-o-y, ave

f 1
Notes: BMI forecasts. GDP at market prices, Fiscal years ending March 31 (1990=1990/91); 2011=FY2011/12, 3 4 5 Factor Cost, f=BMI forecast; New series used from 2005/06 onwards; Sources: Central Statistics Organsation/BMI. World Bank/UN/BMI.
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Real Estate Risk Reward Ratings

Real Estate/Construction Risk/Reward Ratings
Table: Real Estate/Construction Risk/Reward Ratings
Real estate market India Australia Singapore China South Korea Malaysia Hong Kong Indonesia Taiwan Pakistan Japan Philippines Thailand Vietnam 87.50 65.00 50.00 45.06 na 52.50 50.00 80.00 60.00 67.50 57.50 65.00 na na
Country structure 37.16 91.58 90.88 45.06 71.29 52.85 88.33 35.32 67.00 29.30 74.55 40.77 36.74 16.67
Potential Returns 69.88 74.30 62.68 67.77 59.08 52.62 60.17 64.36 59.20 54.13 65.09 56.52 40.49 51.33
Market risks 90.00 66.67 80.00 86.67 76.67 90.00 70.00 80.00 76.67 85.00 53.33 70.00 76.67 36.67
Country risks 19.84 49.66 55.29 24.51 42.55 34.31 49.87 16.48 34.49 26.68 50.57 29.34 39.39 29.55
Risks 65.44 60.71 71.35 64.91 64.73 70.51 62.96 57.77 61.90 64.59 52.37 55.77 63.62 34.18
Real estate rating 67.66 67.51 67.02 66.34 61.90 61.57 61.56 61.07 60.55 59.36 58.73 56.15 52.05 42.76
Rank 1 2 3 4 5 6 7 8 9 10 11 13 14 15
na = not available/applicable. Scores out of 100, with 100 the best. Source: BMI
Business Environment Outlook

BMI View: The main challenges facing the business environment in India centre around its poor infrastructure. This will be a key challenge for the government. The increased scope for public-private partnerships (PPPs) is a boon, however, which will no doubt reduce the infrastructure spending burden on the government, as well as offer attractive investor opportunities. Infrastructure aside, India's business climate is still dogged by excessive red tape, high levels of corruption and a volatile security outlook.
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Table: BMI Business And Operation Risk Ratings
Infrastructure Rating Afghanistan Australia Bangladesh Bhutan Cambodia China Hong Kong India Indonesia Japan Laos Malaysia Maldives Nepal New Zealand Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam 26.6 75.0 41.6 23.0 31.4 56.3 70.0 47.4 37.1 78.3 36.8 55.3 40.3 28.1 77.4 35.5 50.7 79.0 71.2 45.7 60.6 59.5 47.8
Institutions Rating 24.7 78.2 21.8 48.5 24.2 52.4 80.7 42.0 31.2 80.1 22.6 66.9 52.5 32.6 91.0 32.9 39.0 83.9 52.7 42.5 67.0 59.3 36.7
Market Orientation Rating 20.5 70.1 29.3 24.4 50.9 46.6 85.2 42.9 52.3 55.9 19.8 67.9 30.7 23.2 77.1 41.7 60.0 79.4 53.5 40.0 60.4 67.8 51.0
Business Environment 23.9 74.4 30.9 32.0 35.5 51.8 78.7 44.1 40.2 71.4 26.4 63.4 41.2 27.9 81.8 36.7 49.9 80.8 60.6 42.7 62.7 62.2 45.2
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
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Institutions
Legal Framework India's legal framework is derived from English common law and is complex and archaic, with a variety of often conflicting regulations still in place. The court system is prone to lengthy delays, with most courts lumbered with numerous unsettled dispute cases. Foreign businesses have to manoeuvre through a panoply of rules and certifications to obtain the estimated 70 separate approvals needed for setting up shop in India (unless they are operating within a special economic zone). Meanwhile, delays are routine and liquidating a bankrupt company can take up to 20 years.
There is a perception that India lacks effective respect for the sanctity of contract. However, there is an increasing number of agreements that provide for arbitration. International awards are enforceable under multilateral conventions such as the Geneva Convention. The International Center for Alternative Dispute Resolution has been established as an autonomous body to promote settlement of domestic and international disputes. On the whole, the legal system appears to be in a state of transition, with the end goal of being more responsive to the needs of foreign businesses and the private sector. However, major shortcomings exist.
Although foreign lawyers are currently prohibited from practising by the Indian Bar Association, there are signs that the market could open up in the near future. There have been calls from the legal community for action and the Prime Minister has shown his public support for the liberalisation of the legal market.
Positively, judges of the Supreme Court and the High Court have enormous freedom from political and other interference during their tenure. No judge has been removed by the parliament in more than 50 years of independence. However, there is some evidence of importance being given to political and sectarian considerations in the appointment of judges.
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Table: BMI Legal Framework Rating
Investor Protection Score Afghanistan Australia Bangladesh Bhutan Cambodia China Hong Kong India Indonesia Japan Laos Malaysia Maldives Nepal New Zealand Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam 1.2 52.9 33.0 12.7 16.7 58.5 90.5 64.2 34.7 82.5 1.2 76.9 40.1 44.5 92.4 46.5 38.7 95.6 11.1 51.4 64.2 63.9 31.9
Rule Of Law Score 13.7 91.8 28.5 52.9 14.8 26.8 44.9 65.4 37.3 82.1 11.1 56.5 41.7 27.0 92.7 15.1 48.5 72.6 77.0 52.3 72.4 37.7 24.7
Contract Enforceability Score 29.2 76.5 4.6 99.1 40.4 86.4 84.5 11.3 23.3 75.9 50.6 43.9 57.7 35.8 83.7 35.7 33.9 76.7 40.3 35.3 70.2 79.3 66.9
Corruption Score 6.3 92.8 25.4 65.6 21.3 29.3 81.8 45.3 37.8 90.0 6.2 45.8 46.4 25.7 96.6 14.1 25.1 60.1 68.4 26.1 72.5 38.0 17.4
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Property Rights The government does not permit investment in real estate by foreign investors, although it allows for the foreign ownership of company property used to do business. Moreover, India's legal system places a series of restrictions on land transfers. As the process for establishing titles is unclear, this also impedes the process of buying and selling real estate. India lacks a reliable system for recording secured interest in property. As a consequence, investors find it difficult to use real estate as collateral.
Non-resident Indians (NRIs) are permitted 100% equity investment in real estate, while foreign institutional investors (FIIs) can now invest in real estate Initial Public Offerings (IPOs) and can also participate in pre-IPO placements undertaken by such real estate companies without regard to the FDI stipulations.
Subject to certain sector-specific restrictions, foreign and domestic private entities may establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices and liaison offices. However, to establish a business, various approvals and clearances are required, including registration and allotment of land; sanction of power and finance; approval for construction activity and building plan; registration under State Sales Tax Act and Central and State Excise Acts.
Although the government passed the Securitization Act in 2002 to introduce bankruptcy laws, the requirement to obtain government permission before shutting down some businesses makes it difficult to dispose of company assets.
Intellectual Property Rights Despite a relatively coherent set of copyright laws, enforcement is ineffective and piracy prevalent. Trademark protection is better and is now equivalent to international standards following the 1999 Trademark Act that codified the use and protection of foreign trademarks and service marks. India continues to come under international pressure to improve its IPR regime. Enforcement is undermined by weak judicial avenues of redress. Since 2005, India has extended product patent coverage to pharmaceuticals and agro-chemicals.
The government has indicated its willingness to join the Madrid Protocol, allowing international and Indian brand owners to extend their trade mark protection into the country and overseas, respectively, although the timeframe for this has repeatedly been delayed. News reports in early 2009 claimed that the government was planning to present parliament with a bill amending the Copyright Act, making it illegal to break the security code of all kinds of computer software in addition to accessing computer networks and websites without authorisation.
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However, we expect such an amendment to figure relatively low on the new government's agenda, if at all. Moreover, in spite of a series of reforms over a number of years, infringement, especially on the anticounterfeiting front, remains a serious problem, with many observers blaming poor enforcement and weak deterrents for counterfeiters as the main obstacles.
As a result, India remains one of the 12 countries on the 'priority watch list' for 2011 compiled by the Office of the US Trade Representative. Stronger protection for copyrights, trademarks and patents are all necessary to improve IPR enforcement, according to the USTR report. In addition, India has yet to approve the treaties of the World Intellectual Property Organization, a UN agency dealing with IPRs. Its main activity so far has been to promote IPRs all over the world, but many developing countries, India included, argue it has gone too far in boosting patents and copyright, at the expense of consumers and the public in general.
Corruption Corruption and red tape are major issues of concern for investors in India, and the country has fallen from 87th in 2010 to 95th in 2011 (out of 183 countries) in Transparency International's Corruption Perceptions Index. 2010 was an 'annus horribilis' for corruption in India. We saw the mishandling of the Commonwealth Games, an investigation into the 2G spectrum auction (India's most costly scandal to date), the Mumbai property affair and a WikiLeaks expos on alleged cash-for-votes to secure a nuclear deal. Further embarrassing the coalition, the head of India's anti-corruption watchdog was forced to resign in early March 2011 on the grounds that he himself faces corruption charges.
Wide-ranging administrative discretion provided by India's legendary bureaucracy provide numerous opportunities for officials to extort bribes. The lack of transparency in governance rules and excessive bureaucratic procedures provide the context for graft to prosper.
In particular, the government procurement system has been identified as being riddled with corruption and malpractice. Some progress has been made in combating corruption in recent years, with several public officials indicted or convicted under anti-corruption laws. According to the World Bank's 2010 Doing Business survey, India ranks at a relatively lowly 133 on the overall ease of doing business in 183 countries.
With corruption in the headlines, however, the authorities are being forced into action. The government in 2011 failed to pass the Jan Lokpal bill which would essentially put in place an independent anticorruption body but will look to do so in 2012.
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Infrastructure
Physical Infrastructure Infrastructure is seen as a key weakness for India when compared to China and other peer nations. Poor roads, ports and railways are commonly viewed as a key factor preventing India from achieving the high growth rates seen in China and other East Asian nations over the past decades. Multiple governments have attempted to close this deficit but progress has often been held back by red tape and corruption among public officials as well as protests by locals which have caused severe delays and cost overruns to infrastructure projects, thus discouraging participation by private sector partners.
Without more substantial improvements to the country's infrastructure, growth beyond India's long-term trend (at roughly 7.5%) will be difficult to achieve. This now appears to be recognised by the ruling United Progressive Alliance government, which has made public infrastructure investment a key priority. The FY2011/12 union budget, presented by Finance Minister Pranab Mukherjee in February 2011, saw the Indian government reaffirm its commitment to infrastructure, releasing 23.3% more funding to this sector compared to FY2010/11, reaching INR2,140bn (US$48bn) in FY2011/12, equal to 17% of total budgetary expenditure. Meanwhile, government authorities involved in infrastructure development have been allowed to issue tax free bonds amounting to a total of INR300bn (US$6.7bn). This includes the Indian Railway Finance Corporation INR10bn (US$222mn), the National Highway Authority of India INR10bn (US$222mn), the Housing and Urban Development Corporation INR5bn (US$111mn) and Ports INR5bn (US$111mn).
These initiatives provide greater impetus for India to achieve its infrastructure investment targets in its 11th Five Year Plan (2007/08-2011/12). During the mid-term appraisal of the 11th Five Year Plan, many of the targets for the various infrastructure subsectors were downgraded by India's Planning Commission due to the lack of private sector investment. As such, the FY2011/12 budget will look to meet these new targets through greater public investment, while relaxing restrictions for FIIs to boost long term financing from private investors. These initiatives are likely to be looked upon favourably by India's domestic infrastructure companies such as Larsen & Toubro and Reliance Infrastructure, who have seen a slowdown in order inflows and are in need of financing.
Labour Force India's working age population (those aged 15-64) is forecast by the UN at 780.44mn in 2010, representing 64% of the population. This is projected to peak at 69.4% of the population in 2040, although in absolute terms it will keep rising until at least 2050. Large public companies regularly hire about 10,000 new staff every year.
Most Indians are employed in agriculture, accounting for approximately 60% of the total workforce. But services and industry sectors are becoming larger employers. Skills levels in certain sectors are high, with
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a large pool of scientific and technically adept employees. Many large international companies have R&D facilities in India. However, illiteracy levels are high. Despite strong economic growth, employment growth has remained largely flat. This has ensured that public policy is geared to the growth of labourintensive sectors such as manufacturing. Although labour is plentiful and inexpensive, wage growth in certain sectors has been in double digits as competition for jobs has intensified.
Comprehensive draft legislation on labour reform is pending parliamentary approval, with provisions for taking action on strikes and lockouts. The existing labour laws are confusing, frequently overlap and are increasingly extensive, with more than 45 pieces of relevant legislation covering the labour market. Most labour laws apply only to workers in the organised sector, excluding the small-scale sector, agriculture and most construction activities. Although approval is needed before making manufacturing workers redundant, this is not required of service-sector employees.
The payment of wages is governed by the Payment of Wages Act of 1936 and the Minimum Wages Act 1948. Industrial wages range from about US$3 per day for unskilled workers to more than US$150 per month for skilled production workers. Average GDP per capita income was estimated at US$1,136 in 2009. Collective bargaining is increasingly common, although agreements normally apply only at the plant level. The government sets a floor minimum wage for all scheduled employment, and sets distinct minimum wages however, these are generally not enforced.
Restrictive labour laws have negatively impacted greater FDI inflows in the manufacturing sector. However, reform is under way, with expanded contract employment and streamlined labour regulations. An amendment to the Industrial Disputes Act, if approved, will increase the threshold limit to 300 employees for seeking government approval before laying off workers.
India is prone to sporadic outbreaks of industrial strife. The organised labour movement is vocal. The Indian National Trade Union Congress (INTUC), affiliated to the Congress party, generally favours settlement of disputes through arbitration. However the All-India Trade Union Congress (AITUC), linked to the Communist Party of India, has a track record of militancy and strikes. When strikes do occur, negotiation is the most common form of bringing them to a conclusion. Many foreign-owned manufacturing companies avoid strikes by employing a labour welfare officer to act as a go-between with the local labour representatives.
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Table: Labour Force Quality
Literacy Rate,% Afghanistan Australia Bangladesh Bhutan Cambodia China Hong Kong India Indonesia Japan Laos Malaysia Maldives Nepal New Zealand Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam 28.1 99.0 47.9 47.0 73.6 90.9 93.5 61.0 90.4 99.0 68.7 88.7 96.3 48.6 99.0 49.9 92.6 92.5 97.9 90.7 96.1 92.6 90.3
Labour Market Rigidity Score 20.0 24.0 28.0 7.0 36.0 31.0 0.0 30.0 40.0 16.0 20.0 10.0 18.0 46.0 7.0 43.0 29.0 0.0 10.0 20.0 46.0 11.0 21.0
Female Labour Participation, % na 45.3 39.8 31.7 48.8 45.9 46.1 28.3 37.0 41.6 50.7 35.2 41.1 45.0 46.1 18.7 38.3 41.3 41.3 39.8 20.9 46.3 na
Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 1 = highest score
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Market Orientation
Foreign Investment Policy India has over the past decade become an increasingly attractive destination for foreign direct investment (FDI). Its large market size, positive cost structure and favourable macroeconomic climate are proving the major draws for foreign investors, who are also attracted by a highly educated workforce and strong management talent. Compared with similarly sized China, India's FDI flows are small, but they are also more skill-intensive, concentrated in the information and communication technologies (ICT) and services sectors.
The government is committed to liberalising its FDI regime, with recent increases in caps on investment in civil aviation and a promised loosening of restrictions on foreign investment in the retail sector. But while India has made a number of improvements since 2000, realising its full FDI potential will require further measures across a range of areas. Significant obstacles include the (lack of) enabling legal environment for investors, an overweening regulatory burden and concerns over labour market flexibility.
Since 1991, India has relaxed many of the restraints placed on foreign investment, but the country presents a far from uniform picture in its openness to FDI. In addition, overseas investment is still prohibited in some sectors or sub-sectors:
The government has operated a system of automatic FDI approval in a number of sectors, with the list of areas open to investment increasing gradually since the mid-1990s. In May 2005, Prime Minister Singh promised that the restricted retail sector would be opened to FDI. However, junior trade minister Jyotiraditya Scindia stated on July 13 2009 that the government had no plans on changing its policy on FDI in the retail sector. Similarly, a lack of consensus has meant continued delays in increasing the FDI limit to 49% from 26% in the insurance sector, although we believe the new government could move ahead on this once the need to supply more stimulus to the economy has subsided. Restrictions on foreign investment in telecom service firms, however, was raised to 74% from 49% in October 2005.
Some areas do not need government approval, with only a simple notification of the Reserve Bank of India (RBI) necessary. But others need approval from the Foreign Investment Promotion Board or the Cabinet Committee on Foreign Investment, which is usually a straightforward procedure.
Various sectors are open to 100% FDI: manufacturing, advertising and film, power, coal and lignite processing, drug manufacturing, business-to-business e-commerce, hotels, tourism and restaurants, non-banking financial services, petroleum marketing, ports, postal services and
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telecoms equipment manufacturing. Foreign investors are also allowed to bid for privatised stateowned units.
Foreign investment is prohibited in real estate (with limited exceptions), retailing, legal services, agriculture and plantations (except tea), security services and railways.
The policy impetus is further to consolidate the liberalising trend in FDI. In January 2005, the government eased restrictions on new FDI by foreign partners of joint ventures. Under the previous regulations, issued in 1998, foreign partners needed to obtain a release by the Indian partner and government approval for any new investment. New joint venture partnerships are free to negotiate terms as they see fit.
Bilateral investment treaties have been signed with 57 countries. The rupee is fully convertible for current account transactions, and full repatriation of profits is allowed. Comfort levels have been bolstered by improvements in this area in the last couple of years. However, investors frequently complain about a lack of sanctity of contract, and the court system is still clogged with disputed cases involving foreign investors.
Leading sectors for FDI are ICT and software, business services and consumer electronics. The key country sources of FDI are the US, UK and Germany.
The Singh administration has attempted to implement an aggressive special economic zone (SEZ) policy, reflecting its desire to recreate China's success at developing its manufacturing sector by offering tax breaks and other incentives in special zones to attract overseas capital from such places as Dubai and Singapore. The Special Economic Zone Act, which is aimed at attracting industrial investment to rural areas by offering a 15-year tax holiday for activities in the zones, has been the flagship of the government's industrial policy, and the commerce ministry is expecting the SEZs to generate one million jobs.
The success of the SEZ policy has been limited. The farmer backlash has been severe, and this has caused the government's reform drive to stall. Because of the strength of the opposition, even though more than 400 zones have been announced since the Special Economic Zone Act was passed in February 2006, only a fraction of these have received a green light for development.
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Table: Asia, Annual FDI Inflows
2006 US$bn Australia Bangladesh Cambodia China Hong Kong India Indonesia Malaysia Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam 25.74 0.79 0.48 72.72 45.05 19.66 4.91 6.05 4.27 2.92 24.74 4.88 0.48 7.42 9.01 2.36 Per Capita 1,255.40 5.7 34.2 55.3 6,520.60 17.3 21.5 231.6 27.5 33.9 5,646.50 101.6 24 324 142 27.5
2007 US$bn 22.27 0.67 0.87 83.52 59.9 22.95 6.93 8.4 5.33 2.93 24.14 2.63 0.53 8.16 9.58 6.74 Per Capita 1,075.70 4.7 60.3 62.5 8,602.30 19.9 29.9 316.2 34 33.3 5,441.20 54.6 26 354.8 149.9 77.5
2008 US$bn 46.77 1.09 0.82 108.31 63 41.55 7.92 8.05 5.44 1.52 22.72 7.6 0.75 5.43 10.09 8.05 Per Capita 2,227.30 7.6 55.8 80.4 9,000.40 36 33.8 298.3 33.8 16.9 4,695.10 156.4 38.8 236.2 156.9 92.7
Source: BMI, UNCTAD
Foreign Trade Regime The government is committed to liberalising its restrictive trade regime as part of an effort to double India's share of world trade. A free trade agreement with the ASEAN countries, which will improve its access to a number of promising markets, is on the verge of being concluded, but this has been repeatedly delayed by planned summits being delayed due to political turmoil in Bangkok. The government is also working to improve customs clearance, and is in the process of negotiating a number of regional trade pacts.
India joined the World Trade Organisation in 1995. It has negotiated the South Asia Free Trade Agreement (SAFTA), comprising other South Asian countries, and also concluded agreements with ASEAN and Thailand while still negotiating with Japan. The SAFTA treaty envisages a trade liberalisation programme, comprising a list for immediate tariff reduction (0-5%) and a residual list. It has also negotiated a preferential trade pact with Mercosur, the Latin American trade bloc.
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From a very high level, successive Indian governments have worked to bring down tariff rates since the early 1990s. Tariff reductions continued in 2007, with the peak non-agricultural tariff rate reduced from 12.5% to 10%.
However, this progress has been undermined by the imposition of some tariff and non-tariff barriers. The government has introduced restrictions such as adjustment of tariffs and anti-dumping duties. A 'sensitive' list of imports stretches to 300 items, though the government says these are under constant review. The IMF says there is still considerable scope for further trade liberalisation. An additional 4% duty is levied on all products, except those deemed duty free.
With exceptions, most tariffs are ad-valorem duty levied on the value of the item. All tariffs and duties are reviewed in the annual budget. Non-tariff barriers mainly comprise anti-dumping measures to protect domestic manufacturers. India initiated 15% of all global anti-dumping cases in the 1995-2004 period.
While tariffs have been reduced and quantitative restrictions were largely eliminated in 2001, India has increasingly relied on non-tariff barriers, including technical standards and regulations, sanitary rules, local content schemes and quotas. Also, since January 2005, a new patent law has been in place designed to bring India in line with international standards and put local intellectual property rights protection on a par with WTO and Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provisions. It overthrows a key tenet of the 1970 Indian Patent Act that restricted patents to manufacturing processes rather than end products.
Table: Trade And Investment Ratings
Openness To Investment Score Afghanistan Australia Bangladesh Bhutan Cambodia China Hong Kong India Indonesia Japan Laos 34.7 68.6 13.8 33.7 82.6 39.9 96.8 36.8 39.4 5.6 35.9
Openness To Trade Score 6.2 35.1 34.3 24.6 81.6 65.5 97.7 38.9 60.0 34.4 17.7
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Table: Trade And Investment Ratings
Openness To Investment Score Malaysia Maldives Nepal New Zealand Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam 47.5 27.5 46.8 71.4 59.6 59.5 67.9 4.9 22.3 0.0 54.8 80.7
Openness To Trade Score 97.2 43.0 20.9 76.1 51.4 62.1 99.6 77.5 57.3 87.0 89.0 86.1
Table: Top Export Destinations (US$mn)
Descriptor Exports To United Arab Emirates Exports To United States Exports To China,P.R.: Mainland Exports to China,P.R.:Hon g Kong Exports To Singapore Total Top 5 % From Top 5 Trade Partners
2002
2003
2004
2005
2006
2007
2008
2009
3118.56 10308.3
4676.05 11363.9
6605 12839.3
8280.81 16475.2
11172.1 18515.5
14728.2 20285.4
21847.6 20851.5
20666.7 18280
1719.6
2710.18
4178.48
6473.3
7910.25
10195.1
9663.86
10155
2551.58 1309.26 49157.87 19007.3 38.66583
3099.69 1949.02 60230.64 23798.84 39.51285
3553.95 3377.84 74408.04 30554.57 41.06353
4276.45 5069.12 97317.01 40574.88 41.69351
4628.26 5908.02 119440.2 48134.13 40.29979
5899.06 7042.89 151895 58150.65 38.28344
6572.55 7997.11 172738.6 66932.62 38.74792
6938.38 6721.49 159342.9 62761.57 39.38775
Source: IMF
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Tax Regime Corporate tax revenues have been buoyant, partly reflecting the tax reforms implemented by the government. The main corporate tax rate is relatively high at nearly 34% for domestic firms and 42% for foreign companies. The government is committed to introducing a uniform goods and services tax at the national level. India has concluded tax treaties with more than 70 countries.
Corporate tax: The main effective rate is 41.8% for foreign companies. Resident companies defined as those where management and control are in India are taxed on worldwide income; non-resident companies are taxed on local income.
Individual tax: The effective top rate is 33.7%. Resident individuals are generally taxed on worldwide income, but individuals who are resident but not ordinarily resident are taxed only on Indian-source income or foreign income of a business controlled from India. Residents are defined as those present for more than 182 days in an income year or if present for a total of 365 days in the previous four years.
Indirect tax: Since April 1 2005, a standard federal VAT rate of 12.5% has applied. The lower rates are levied at 4% and 1%, with some products and services zero-rated. States also apply indirect taxes, but the government is looking to standardise these.
Capital gains tax: Short-term gains defined as gains on assets held for less than three years, or less than one year in the case of listed securities are taxed as income. Long-term gains of companies and individuals are taxed at 20%.
Withholding taxes: There is a 20% tax on interest, and a 10% tax on royalties for agreements entered after June 1 2005. Dividends are not subject to withholding tax.
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Operational Risk
Security Risk The UK Foreign and Commonwealth Office considers there to be a high risk from terrorism in India, which is in the highest of its four categories, and the country is ranked number two worldwide in the Global Terrorism Indicator index, behind Sudan. The FCO cites the rise of indiscriminate attacks, including in cities frequented by British expatriates and foreign travellers. Since July 2006, there have been terrorist attacks in major cities including Mumbai, New Delhi and Ahmedabad.
Some areas are subject to terrorist attacks on effectively a daily basis. The areas most susceptible to attacks are Jammu and Kashmir (excluding Ladakh) and the north-east regions. Additionally, there have been a number of bombings across the north-eastern state of Assam since 2006, including in the state capital, Guwahati. Violent left-wing extremist groups are also active in the rural areas of Bihar, Jharkland, Chhattisgarh, West Bengal and Orissa.
Apart from this risk of terrorism, there also exists a moderate security risk. Petty theft is common in crowded areas such as markets, airports and bus and railway stations. The crime rate has increased in tandem with a rise in handbag snatching in Delhi; reports of travellers being drugged and robbed on trains; and scams and intimidation tactics used against tourists in Agra and Jaipur. In addition, women travelling alone have been subject to unwanted attention and have been sexually harassed and assaulted. Women should avoid walking alone at night in deserted areas, including city streets, village lanes and beaches.
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Competitive Landscape
According to the Reserve Bank of India, outstanding commercial real estate loans amounted to INR1,187.1bn as of January 2012, up 12.2% year-on-year (y-o-y). However, listed firms in the same period claimed that bank lending has shrunk. It appears that a trend is emerging for banks to lend to unlisted players supporting the continued increase in lending figures. A report by VVCircle has implied that this shift is in part due to the riskier and larger projects generally undertaken by listed firms, who also chase harder targets to maintain their status. So although growth in lending has slowed (January 2011 saw a 19.9% y-o-y hike), the new trend could increase competition in the commercial sector as more unlisted firms come to the fore.
In August 2011, it was reported that over the previous 12 months, the total debt burden of 11 listed real estate companies in India had reached a high of INR385bn, marking an increase of 15%. According to analysts at Edelweiss Securities, approximately 50% of this debt was carried by DLF, one of the countrys most established developers. Critical for all developers, however, will be to ensure that this debt level does not increase over future months, prompting higher interest rates to lenders.
To this end, DLF (which operates in all segments of the real estate sector commercial, residential, retail, hotels, infrastructure and leisure) in September 2011 announced the sale of 10.8 acres of land in Gurgaon to an Indian investor based in Dubai. The sale was worth INR2.8bn and the company is hoping to sell another 20 acres in the city worth approximately INR4.0bn. These are just two of a number of recent land sales DLF has undertaken or investigated in an effort to reduce its debt burden.
Parsvnath also concentrated in late 2011 on its fundraising capabilities. On September 26, the companys shareholders approved a move to raise up to INR20bn through issuance of securities. This followed the board of directors approval of a 12-month fundraising plan, starting in August 2011.
Reports have emerged of a massive oversupply in retail property. Crisil Research predicts that of 8.9mn m2 added of retail space between 2011 and 2013, demand will only exist for 3.2mn m2, or approximately 36%. This would cause a sharp fall in rental rates as developers became less able to find occupants for their existing retail premises.
As a result of this oversupply, RMZ Corporation has converted its Bangalore shopping mall plan into one for luxury housing, while Parsvnath has shelved five retail projects. Many of Indias other real estate majors, such as Sobha Developers, Phoenix Mills and Entertainment World Developers, are either redesigning (with a heavier focus on residential space) or stalling their existing projects.
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These liquidity and supply issues have been feeding reticence on the part of international investors and developers to pursuing projects in the Indian real estate sector. These issues are underlined by fears over eurozone and US debt, and whether this could have an effect on major trade partners in other regions (eg, India and China). However, debt fears in the more developed regions could also serve as a boon to investors, who may see the Indian market as a more stable prospect than the stagnating markets in Western Europe and the US. It remains difficult to predict in which direction the current climate will push real estate investment.
Amid this uncertainty, India-based BPTP has reported that it is buying back Merrill Lynchs stake in Gurgaons Crest office building, in which BPTPs corporate headquarters reside. The sale, worth INR1.8bn, may support the idea that domestic companies are re-asserting their local investments, perhaps ahead of a surge in foreign activity.
Amid this uncertainty, however, a number of developers are still reporting increased sales and new investment plans. Ansal Properties (one of the 35 companies run under the conglomerate Ansal Group) said that in the first four months of FY2011/12 (April-July) it sold more than 880,000m2 of area, for a total INR11.38bn.
Reports emerged in early January 2012 that Red Fort Capital a real estate private equity firm is in the final stages of raising US$500mn in funding to invest in commercial and residential real estate in India. The firms activities are focused on India at present, and could be indicative of a subdued optimism for the future of the countrys real estate potential.
This also supports a trend identified by Jones Lang LaSalle India for corporate organisations to make up a good portion of the Indian real estate industrys stakeholder profile. The growth in real estate (despite high prices, interest rates and currency depreciation) has led to this trend, which is also reportedly beginning to drive improvements in transparency and construction, in order to match improvements in demand. According to World Property Channel, private equity funds such as Red Fort Capital are increasingly sourcing investment opportunities brought about by the fragmented nature of the Indian developer community.
The Confederation of Real Estate Developers Associations of India (Credai) represents over 5,000 private developers in the country through a number of member associations. By bringing these organisations under one umbrella, Credai hopes to create links between the developers and the consumer or government, to promote better practices and more transparency in the industry. The organisation represents majors including Parsvnath, DLF and Ambuja Realty.
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Company Profiles
Ambuja Cements Ltd
Strengths Leading and innovative cement company with strong Indian national presence and growing export markets. Weaknesses Opportunities Business sensitive to economic conditions and rising costs in form of fuel. Ideally placed to ride wave of growth in development in regional and rural areas and to benefit from government stimulus spending. Threats Falling demand outside India, which could hamper export growth. The Indian economy faces some continued uncertainty.
Company Overview
Ambuja Cements (formerly Gujarat Ambuja Cements) manufactures and markets cement and clinker for domestic and export markets. It exports almost 17% of its cement, and has been Indias largest exporter of the commodity for the past 10 years. Ambuja Cements is India's third largest cement maker. The company was established in 1986. Holcim, the global cement company, holds more than 46% of Ambuja shares. Total public shareholding in Ambuja amounts to 47.8%. The companys breakthrough came in 1993 when it set up a complete system of transporting bulk cement by sea, rather than by road and rail in bags. It was the first company in India to introduce bulk cement movement by sea and now about 10% of all cement in India travels this way. In mid-September 2011, Ambuja announced the acquisition of a 60% stake in fly-ash manufacturer Dirk India. In a deal worth INR165mn (US$3.5mn), Dirk India and its units will become subsidiaries of Ambuja Cements. In March 2012, Ambuja announced plans to invest INR1,800 crore in expanding its production capacity by December 2013. It is in the process of setting up a 2.2mn ton clinkerisation unit in Nagaur, Rajasthan. It also hopes to set up a bulk cement terminal in Mangalore, in southern India.
Financial Highlights
In February 2012, Ambuja recorded a rise in cement production of 11.3% year-on-year (y-o-y), to 1.99mn tons. For the quarter ended September 30 2011 (the most recent data available on the company website), Ambuja recorded total income of INR18.3bn. Net profit amounted to INR1.7bn, a 12.7% increase on the same quarter of 2010.
Key Personnel
Chairman: N Sekhsaria
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Managing director: Onne van der Weijde CFO: Sanjeev Churiwala
Contact Details
Elegent Business Park MIDC Cross Road 'B' Off Andheri-Kurla Road Andheri (East) Mumbai 400 059 Tel: 91 22 4066 7000 Fax: 91 22 4066 7733 Website: www.ambujacement.com
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DLF
Strengths Established developer, particularly in the mid- to high-end markets. The company is fairly resistant to market changes as a result of its broad exposure across sub-sectors. Weaknesses The companys debt burden is relatively high, although an aggressive deleveraging programme is well under way. The recent fall in demand for retail premises could negatively affect DLFs development in the sector. Opportunities Threats DLF appears poised to take advantage of any upturn in Indias economy. Any stalling of Indias growth curve would affect DLFs key customer base the middle class.
Company Overview
DLF operates in all segments of the real estate sector (commercial, residential, retail, hotels, infrastructure and leisure), focusing particularly on development. On its website, DLF says that it was the first company to introduce the concept of launching commercial developments within reach of existing residential areas. DLF's office and retail segment has 1.2mn m of projects under construction, with a total land bank of 6.5mn m for development. The company has begun to focus heavily on retail and is in the process of creating new shopping centres across India. DLF focuses on two business segments: the development of commercial complexes for sale, and so-called annuity projects, namely offices and retail shopping centres.
2 2
Recent Developments
DLF is looking to sell its ownership stake in Aman Resorts, its biggest non-core asset. After purchasing a 97% stake in the hotel company in 2007, the sector has apparently seen a downturn that has led to DLFs decision to sell. It was expected that an announcement regarding the deal would be made in mid-January 2012, though at the time of writing none was available.
In its results for Q3 FY11 (ended December 31 2011), DLF recorded net profit of INR2.6bn, on sales of INR20.3bn. As expenditure was lower than in the previous quarter, it seems that the decline in sales were responsible for the corresponding drop in net profit. For Q2 FY11 ended September 30 2011, DLF recorded net profit of INR3.7bn, on overall sales of INR25.3bn. This was a decrease in net profit of almost 11% year-onyear (y-o-y), possibly reflecting the effect of current global economic concerns on Indias real estate activity.
Key Personnel
Executive chairman: K Singh Managing director: T Goyal
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Contact Details
DLF Centre, Sansad Marg New Delhi 110 001 www.dlf.in
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Parsvnath Developers Ltd

Strengths Wide geographic and sectoral exposure, which would leave Parsvnath in a better position than some of its rivals if growth in the sector fluctuates. Good government contacts and pipeline of infrastructure opportunities. Weaknesses Relatively high leverage, although this is being addressed through a series of investments and capital injections. A slowdown in retail real estate activity has caused the delay of a number of projects in Parsvnaths pipeline. Opportunities Threats Well placed to benefit from national and regional stimulus packages. The recovery in the housing segment since the global slowdown could fuel increased competition.
Company Overview
Parsvnath is a major Indian real estate company, operating in 44 cities throughout 15 states in the country. It operates across all real estate sectors, including residential, commercial, retail and leisure. The company has been in operation since 1984 and listed on the Bombay Stock Exchange on November 30 2006. During FY2010/11 the company raised INR6.8bn through five project level special purpose vehicles from private equity funds, as part of a period of consolidation.
Recent Developments
In early January 2012, Indian Realty News reported that Parsvnath is one of a number of companies that stalled upcoming retail projects or redesigned them to incorporate other sectors of property due to existing oversupply in the sector. Parsvnath reportedly had to shelve or redesign five projects, including the Metro mall in Delhi.
On February 13 2012, Parsvnath recorded its results for Q3 FY11, ended December 31. Operating revenue reached INR2.4bn, with profit after tax of INR230mn. For the first nine months of FY11, the company recorded revenue of INR7.1bn, with profit after tax reaching INR770mn. For the quarter ended September 30 2011, total revenue reached INR2.55bn, an increase of 28.8% y-o-y. However, expenditure also increased, in particular the cost of construction and development. This resulted in the company recording net profit of INR290.9mn, a decrease of 41.6% y-o-y. Total revenue for the year ended March 31 2011 fell 4.6% to INR9,420mn (US$213mn), compared to INR9,880mn a year earlier. Profit after tax was up 4% to INR1,410mn (US$32mn), compared to INR1,350mn in FY2009/10.
Key Personnel
Chairman: Pradeep Kumar Jain Managing director: Sanjeev Kumar Jain
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Chief Financial Officer: Sunil Malhotra
Address
Parsvnath Developers Ltd 6th Floor, Arunachal Building 19, Barakhamba Road, New Delhi 110 001 Tel: 91 11 4368 6600 Fax: 91 11 2331 5400 www.parsvnath.com
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Sobha Developers Ltd

Strengths Weaknesses Substantial regional development operations based in Bangalore. Relatively high debt levels, although it has taken steps to address this. High exposure to regional downturns that have been severe in some areas. Opportunities Ideally placed to benefit from renewed growth in India. It can be expected to benefit from various stimulus spending measures. Threats Bangalore in particular is subject to foreign economic trends, which could put a dampener on economic growth there.
Company Overview
Established in 1995, Sobha is one of Indias largest construction companies. Its initial public offering (IPO) in 2006 was oversubscribed by 126 times. It is an industry leader in Bangalore, where it is based, but also operates in Kerala, Andhra Pradesh, Orissa, Tamil Nadu, Punjab, Harayana and Maharashtra. It undertakes residential and commercial projects. The company operates an integrated business model (which it calls backward integration) with the resources needed held in-house. This, it says, provides the ability to deliver a project at every stage of development.
Recent Developments
By March 31 2011 Sobha Developers reported having completed 72 residential and 193 commercial projects, covering over 4mn m of built-up space. It had 41 ongoing non-residential (contractual) projects. Over FY2010/11 the company sold a total 258,000m of space. In its operations update for the quarter ended December 31 2011, Sobha announced that it expects to achieve total new sales in the region of INR15bn in the financial year 2011/12 (ended March 31 2012). This follows a Q3 FY11/12 in which it sold 76,000m of space.
2 2 2
Sobha Developers has reorganised debt, bringing on board a private equity partner and successfully completed a qualified institutional placement (QIP) raising INR5bn. Sobha lifted revenue and profit for the 2010/11 financial year by slightly more than 30%. This is an outstanding performance in an industry where growth is far from stable. In Q3 FY11 (ended December 31), Sobha recorded revenues of INR3.16bn, with profit after tax of INR401mn. New sales volumes were up 16% y-o-y, and the company moved into the Chennai market during the quarter with two major projects. For the quarter ended September 30 2011, Sobha reported total operating income of INR3.29bn, a 22.9% y-o-y drop. Net profit also decreased, reaching INR409mn from INR589mn a year earlier.
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Results for the year ended March 31 2011: Total operating income: INR14,484mn (US$327mn), up from INR11,072mn a year earlier. Net profit: INR1,824mn (US$41mn), up from INR1,367mn a year earlier.
Key Personnel
Chairman: PNC Menon Managing director: J Sharma Chief Financial Officer: B Subramanian
Contact Details
Sobha Developers Ltd, 368 7th Cross, Wilson Garden, Bangalore 560 027, Karnataka, India Tel: 91 80 2229 5936 Fax: 91 80 2212 0852 www.sobhadevelopers.com
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BMI Methodology
How We Generate Our Industry Forecasts
New Approach This round of real estate reports incorporates a new approach. In each of the countries surveyed, we have made contact with local sources (typically major commercial real estate agents) and asked them 10 questions in relation to three sub-sectors office, retail and industrial. We have combined the answers into the data tables and text that form part of the Real Estate Market Overview and the Industry Forecast Scenario.
In taking this grass-roots approach, we believe we have ensured that we identify, in a timely fashion, key issues that will likely drive rents and yields over the short, medium and long term. We have developed a framework that facilitates comparisons between cities and sub-sectors in different countries. In developing our long-term forecasts, we have focused on net yields. Our view is that, as yields are driven by both rentals and capital values, the movements in yields provide a convenient short-hand for what is and is not expected to be happening in markets.
Our forecasts are based largely on qualitative judgements. Given that, in most of the countries that BMI surveys, the real estate protagonists are still dealing with the aftermath of the global financial crisis, it is questionable how valuable a quantitative approach would be. In part due to BMIs own macroeconomic research and partly because of the insights gleaned from our in-country sources, we are normally able to comment in an informed way on the likely directions for rentals and capital values. Nevertheless, we recognise that we can and should refine the methodology and incorporate greater quantitative aspects over time as we accumulate more data on each of the various markets that we survey.
In mid-2010, our researchers conducted further interviews with the local sources in order to confirm details pertaining to rental levels and rental yields. In many cases, the new data has caused us to revise our forecasts for 2011-2016.
Overview BMIs industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, uses a general-to-specific method. BMI mainly uses a linear model, but simple non-linear models, such as the log-linear model, are used when necessary. During
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periods of industry shock, for example, a deep industry recession, dummy variables are used to determine the level of impact.
Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including, but not exclusive to: R2 tests explanatory power; Adjusted R2 takes degree of freedom into account; Testing the directional movement and magnitude of co-efficients; Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); All results are assessed to alleviate issues related to auto-correlation and multi-co-linearity.
BMI uses the selected best model to perform forecasting.
It must be remembered that human intervention plays a necessary and desirable role in all of BMIs forecasting. Experience, expertise and knowledge of industry data and trends ensures that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Within the real estate industry, this intervention might include, but is not exclusive to, new investments across sectors, or projects getting cancelled; general investment climate and business environment changes; domestic or regional trends changing; macroeconomic indicators; and regulatory changes.
Example Of Construction Value Model: (Construction Value)t = 0 + 1*(GDP)t + 2*(Inflation)t + 3*(Lending Rate)t + 4* (Population)t + 5*(Government Expenditure)t + 6*(Construction Value)t-1 + t
Construction Industry
A number of principal criteria drive our forecasts for each construction and engineering variable:
Construction GDP And Infrastructure Spending Figures for construction GDP and infrastructure spending are based, where possible, on national accounts as published by the relevant central banks, as well as primary government/ministry sources and official data. Where these are unavailable, construction GDP forecasts are based on a range of variables, including:
Stated infrastructure and development programmes; Likely increases owing to related urban or industrial sector developments; Political factors, such as an electorally motivated public works programmes.
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Construction as a percentage of GDP is calculated using BMIs macroeconomic and demographic forecasts.
Employment Within The Construction Industry These figures are forecast based on: The growth or otherwise of the construction industry; Company results and expansion plans.
Bank Lending
We assume that the growth rate for each of the three variables (assets, loans and deposits) varies over time. The growth rate in 2011 is deemed to be the actual growth rate achieved over the 12 months to the point in time for which the latest data is available. In practice, this is usually a date in late 2011. The growth rate in 2012 is assumed to be a weighted average 80% of the actual rate achieved in the previous year and 20% of the long-term nominal rate of growth in GDP that BMI projects for the five years to the end of 2014. The growth rate in 2013 is assumed to be a weighted average where the respective ratios are 60% and 40%. In 2014, the ratios are reversed. In 2015, the ratios are 20% and 80%. In 2016, the three variables are assumed to increase at the annual rate of growth in nominal GDP over the five years. In effect, 2016 is the only year of the five where the actual growth of the variables achieved in 2010 has no impact on the projected growth rates.
Real Estate/Construction Business Environment Rating

BMIs Real Estate/Construction Business Environment Rating (RECBER) provides a globally comparative, numerically based assessment of the risk/return trade-off for the industry in each state covered by BMIs real estate reports. In order to provide clients with a detailed assessment of this tradeoff, the overall rating is made up of two distinct sub-ratings.
Limits Of Potential Returns Evaluates the industrys current size and growth potential, and also assesses broader industry/state characteristics that may enable or inhibit the industrys development.
Risks To Realisation Of Returns Evaluates issues within (a) the real estate sector, and (b) broader country risk vulnerabilities that increase uncertainty surrounding the stability of anticipated returns on investment into each state.
These ratings themselves comprise sub-ratings.
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The limits rating comprises:
Real estate market. This evaluates industry growth/size dynamics. Country structure. This evaluates the broader economic/socio-demographic environment.
The risks rating comprises:
Real estate risks. This covers real estate-specific factors, including finance. Country risk. This evaluates the industrys broader country risk exposure.
Weighting Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal weight. Consequently, the following weight has been adopted.
Table: Weighting Of Indicators
Component Limits of potential returns Real estate market Country structure Risks to realisation of returns Real estate risk Country risk
Weighting 50%, of which 65% 35% 50%, of which 65% 35%
Source: BMI
In all cases, scores are out of 100, with a higher score indicating greater potential returns (returns), or lower risks (risks).
Indicators The following indicators have been used. Overall, the rating uses five subjectively measured indicators, and over 20 separate indicators/datasets.
Limits Of Potential Returns Real Estate-Specific Factors The ratings score for limits of potential returns considers four real estate-related factors, each of which is given equal weighting.
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Construction output, US$bn (previous year). Absolute size of construction sector used as proxy for size of real estate sector. Construction sector real growth, compound annual growth rate (CAGR) (previous year to three years hence). Indicates prospects for, and confidence in, the construction sector, and hence a proxy for prospects/confidence for real estate sector. Total commercial bank lending, US$bn (end previous year). Real estate projects are long term and capital intensive, with most finance obtained from commercial banks. Indicates funding availability. Commercial bank lending, CAGR (previous year to three years hence). This indicates prospects for the stability of finance and, implicitly, its cost. In times of crisis, this is likely to be the most volatile indicator.
Limits Of Potential Returns Country Structure The ratings score for limits of potential returns considers three other factors, each of which is given equal weighting.
BMIs Business Environment Rating for financial infrastructure. This captures the efficiency of the commercial banking sector and other elements of the financial services industry in making funding available to the real estate sector. Per capita GDP, US$. Higher per capita GDP correlates with the expansion of the middle classes, which are the key market for residential real estate, and the users of commercial and retail real estate properties. Urbanisation, % of total population living in urban areas. Urbanised states tend to be more conducive markets for real estate development, as they have deeper, more mature markets. That said, our scoring methodology views favourably less urban, or even predominantly rural, states that are characterised by persistently strong construction sector growth.
Risks To Realisation Of Returns Real Estate-Specific Factors The ratings score considers three factors that are directly relevant to the real estate sector. These are each given equal weighting. They are: Lending risks, ratio of the growth in nominal lending (ie, by commercial banks to non-bank customers) to the nominal growth in GDP over a five-year period (last year to current year plus three). It is assumed that lending volumes and nominal GDP should, generally, grow at the same rate. If lending growth substantially exceeds nominal GDP expansion, this would suggest deterioration in risk standards by lending institutions. Conversely, if nominal GDP rises substantially faster than bank
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lending, then the cost of finance for real estate ventures is likely to rise (thereby affecting profitability). Financial institution confidence, change in the loan to deposit ratio over a five-year period (last year to current year plus three). This is used as a proxy for the stability of finance. Thus, a rapid decline in the ratio (ie, a lending squeeze) is penalised. Conversely, we are more tolerant of a rise in lending, as in itself, this may be positive for the industry. High rates of lending growth are penalised as they could indicate an investment bubble unless the states Country Risk Short-Term Economic Rating a proxy for vulnerability to an economic shock is very high. Real estate prices, % change y-o-y. There are a number of methodological challenges in identifying suitable proxies for real estate prices in each country. Nevertheless, where possible, we have identified a national index (usually for house prices) and assess annual growth. The rating is symmetrical, in that high growth (which indicates a bubble) is penalised, as is sharp price falls (which indicates that bubbles have been burst). Where no real estate price index is available, this indicator does not affect the overall score for this section.
Risks To Realisation Of Returns Country Risk Factors BMIs Long-Term Economic Rating. A measure of long-term economic stability. BMIs Business Environment Legal Framework Rating. Denotes the strength of legal institutions in each state security of investment can be a key risk in some emerging markets. BMIs Business Environment Bureaucracy Rating. Denotes the ease of conducting business in the state.
Sources
Sources used in real estate reports include UN statistics, national accounts, housing and economy ministries, officially released company results and figures, trade bodies and associations and international and national news agencies.
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