CONNECT INDIA ECONOMIC INDICATORS. India s economy is undergoing a cyclical slowdown with GDP growth forecast for FY 2013 below 6%.

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Bryan Owen
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1 INDIA ECONOMIC INDICATORS India s economy is undergoing a cyclical slowdown with GDP growth forecast for FY 2013 below 6%. Indian economy is experiencing a cyclical slowdown with the GDP growth rate for Q1FY 2013 being 5.5%. This is much lesser than the 7.7% growth during the same period in Lack of market friendly economic policies along with a slowdown in global economic growth have been the main reasons behind the fall in GDP growth. GDP growth has been driven primarily by the services sectorduring Q1 FY 2013 which grew at 6.9%. However, this was much lesser than the growth 10.2% growth registered by the services sector during the same period last financial year. Agricultural activity has taken a setback due to delayed monsoon and grewat 2.9% in Q1 FY13 which was lesser than 3.7% during the corresponding period during FY12, whereas the growth in manufacturing sector remained subdued at 0.2% in Q1 FY13 due to limited capital investments. Index of Industrial Production improved by 2.7% during August Percentage Figure 1: GDP, Inflation & Index of Industrial Production Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug Inflation GDP IIP Source: High inflation and high interest rates have also contributed to the subdued investment climate. The Cash Reserve Ratio (CRR) was brought down further to 4.5% with the aim of improving investments. Prime Lending Rates of leading banks has come down slightly to 14.5% as compared to 14.75% last quarter. Table 1: Key Policy Rates Key Rates Jul 12 Aug 12 Sep 12 PLR* 14.75% 14.75% 14.50% Repo Rate 8.00% 8.00% 8.00% Reverse Repo Rate 7.00% 7.00% 7.00% CRR 4.75% 4.75% 4.50% Source: *Source: In September 2012, Government of India announced policy reforms to improve investor sentiments. The key highlights of these reform measures include: Liberalization in FDI Government of India allowed/ increased limit of foreign investment in the following sectors: Table 2: Sectors and increase in FDI limit Sector Multi-brand retail Current Limit 1 Allowed limit _ 51% Single-brand 100% 51% retail Aviation - 49% Broadcasting 49% 74% Insurance and pension 26% 49% Disinvestment The government cleared disinvestment of stake in five Public Sector Units (PSUs) namely Hindustan Copper, NSALCO, MMTC, Oil India and Neyveli Lignite 1 Current limit refers to limit prior to September STRATEGIC ADVISORY GROUP Page 1

2 Reduction in subsidies Hike in Diesel prices and limit on LPG subsidization upto 6 cylinders of 14.2 kg per annum per consumer Other significant reforms which are likely to improve investor sentiment include: Amendments to the Forward Contract Regulation Bill 2010 Amendments to Companies Bill 2011 Approval of the Amendment of Competition Act 2002 Reduction in tax on overseas borrowings by Indian Companies from 20% to 5% Business optimism improves marginally; hiring intentions decline Dun and Bradstreet s (D&B) Composite Business Optimism Index for Q increased marginally by 3.4% over Q on account of the policy reforms announced by the central government. Percentage Figure 2: Net Employment outlook 0 Q1 Q2 Q3 Q4 Q1 Q Net Employment Outlook Source: Manpower India, Q Q Q On the demand side, the Net Employment Outlook for Q has declined by 35% Q-o-Q as per HR Consultancy firm Manpower. Although employers in all four regions expect their payrolls to increase, hiring intentions are weaker in the West, South and North regions by 39%, 23% and 13% respectively. Hiring prospects are considerably weaker in all seven sectors both Q-o-Q as well as Y-o-Y. Figure 3: Net Employment Outlook: Sector Comparison* Wholesale & Retail Trade Transportation & Utilities Services Public Administration & Education Mining & Construction Manufacturing Finance, Insurance and RE Seasonally Adjusted Outlook Net Employment Outlook Source: Manpower India, Q * Seasonal adjustments have been applied to the data in order to account for employment fluctuations that normally occur at the same time each year The resultant improvement in business optimism on account of the reform measures announced was also witnessed in the performance of the Sensex and Realty Index. Sensex Improved 8% and realty Index gained 11% Q-o-Q. Figure 4: Performance of BSE Sensex and Realty Index in Q Jul 11 1 Aug 11 1 Sep 11 1 Oct 11 1 Nov 11 1 Dec 11 1 Jan 12 1 Feb 12 1 Mar 12 1 Apr 12 1 May 12 1 Jun 12 1 Jul 12 1 Aug 12 1 Sep 12 Realty Index Sensex FDI inflows in the Construction Development 2 sector for Q1 FY 2013 was significantly lower at 2 In line with the extant FDI policy, the Sectors Housing and Real Estates & Construction Activities have been renamed as CONSTRUCTION DEVELOPMENT: Townships, housing, built up infrastructure and construction development STRATEGIC ADVISORY GROUP Page 2

3 INR 1861 Cr which is62% lesser than the FDI inflow in the Construction Development sector during Q1 FY However, the announcement of policy reforms during Q2 FY 2013 is expected to improve FDI inflows into the retail real estate sector. PE Deals in Real Estate increased Q- o-q however; volume was significantly lower Y-o-Y Real Estate PE funds made 10major investments amounting to $ 394 million, an increase of 57% as compared to the previous quarter 3. However, the volume was less than the $726 million investments during the same period last year. Some of the major PE deals during the quarter are given in Table 3. Some of the important fund raising activities during the quarter included: Tata Realty and Infrastructure to float USD 500 million International Fund and USD 55 million Domestic Fund Major PE exit included Fulcrum Ventures India s exit from its investment in Casa Grande Pvt. Ltd. a real estate developer based out of Chennai. Other than this India REIT is also looking to exit its investment portfolio. Other PE deals in the pipeline include: Keystone realtors looking to raise USD 81 million from NBFCs Q also saw some major sale transactions in the Real Estate sector: CHD Developers bought Empire Realtech for USD 18 million Future Capital sold its real estate arm Myra Mall for USD 17.7 million India REIT closes Mumbai Redevelopment Fund for USD 80 million. Table 3: Major Real Estate PE Deals in India, Q PE Firm Developer Building Location Amount (in million USD) JP Morgan Amrapali Developers Residential projects Noida ASK Property Fund Shriram properties Acquire land for residential projects Bangalore, Hyderabad 18.2 ASK Property Fund Mantri Developers - Bangalore 14 Redfort Capital Prestige Estates Residential projects Bangalore 36 IL&FS PE Fund City Corporation Future Towers Pune 21.8 APG and Group of investors Source: Godrej Properties Residential projects Mumbai, Delhi - NCR and Bangalore 138 projects and CONSTRUCTION (INFRASTRUCTURE) ACTIVITIES, respectively 3 Source: Venture Intelligence, published in Indian Express, July 09, STRATEGIC ADVISORY GROUP Page 3

4 INDIA REAL ESTATE MARKET OVERVIEW Q saw Q-o-Q increase in office space supply as well as demand in the four cities while developers and retailers took a restrained approach in the retail segment; Residential activity improved Office:Office market in the four cities witnessed a total supply of 7.35 million sqft in Q Bangalore was the leading contributor to space with 3.53 million sqft of space. Almost all cities witnessed an increase in new supply as compared to Q Total absorption in the four cities was around 5.1 million sqft. Bangalore witnessed the maximum absorption of 2.79 million sqft. Other than the absorption a few pre-commitments were also witnessed in cities like Bangalore, Chennai and Hyderabad. Q also saw a big-ticket land transaction where in Lodha Developers bough 17 acre parcel of land from DLF (which DLF bought from NTC in 2005) in Worli, Mumbai for INR 2727 Cr. Office rentals increased in certain micro-markets like in the case of Outer Ring Road in Bangalore due to consistent demand. However, rentals across micro-markets in other cities largely remained stable. Several malls that were likely to enter the market in 2012 have been deferred to 2013 as developers adopted a cautious approach. However, the impact of liberalization of FDI in retail is likely to be witnessed only in the short to medium term. Although supply was limited, mall rentals were stable due to large pre-leasing activities in new supply that is likely to enter the market in the next few quarters. Residential:Residential activity improved in all four cities. The number of launches increased due to the festive season. Also, drop in home loan rates have had a positive impact on the sale of residential properties. The three southern cities of Bangalore, Chennai and Hyderabad together witnessed an upward of 10,500 residential units being launched during the quarter. Figure 5: Supply and Absorption of Office space in Supply Absorption Supply Absorption Bangalore Chennai Hyderabad Mumbai Figure 6: Retail mall supply in 2012 and expected supply in 2013 Supply Absorption Upto Q Q (E) Supply Absorption Retail:Q saw subdued activity in retail segment. Fresh supply was limited to 0.42 million sqft in Bangalore. Over the last 5 years Mumbai has witnessed an average of 1.5 million sqft per annum of mall supply. However, in 2012 Mumbai has thus far witnessed a supply of 0.5 million sqft. With no new mall likely to enter the market in Q4 2012, this will be the lowest mall supply witnessed in Mumbai over the last 5 years.the total supply of retail space in the four cities upto Q is 1.72 million sqft. No new malls are expected to be added during Q Bangalore Chennai Hyderabad Mumbai upto Q (E) STRATEGIC ADVISORY GROUP Page 4

5 BANGALORE Office Space: The office market in Bangalore saw a fresh supply of 3.53 million sqft in Q Nearly 63% of this supply was along ORRboth in the SEZ and Non-SEZ categories. Key buildings commissioned during the quarter included Teak and Aspen Blocks in Manyata Tech Park, Etamin Block in Prestige Tech Park and Block 11 in Pritech Park (ORR), Gold Hill Supreme (Electronics City) and new blocks in Global Village (Mysore Road). Q witnessed 2.79 million sqft of Grade A office space absorption out of which 0.77 million was SEZ space. ORR witnessed absorption of 1.18 million sqft and the peripheral areas of Whitefield and Electronics City contributed another 1.14 million sqft of space take-up.major pre-leasing activity during Q was by Schnieder Electricals, which signed up 0.5 million sqft in Beary s Research Triangle in Whitefield. values across all micro-markets remained stable. Table 4: Office s 4, Q Micro- Location (INR/sqft/month) Q Q Grade A Grade B CBD SBD ORR _ PBD Retail:Bangalore saw an addition of 421,000 sqft of mall space in Q with the commissioning of Inorbit Mall in Whitefield. Key tenants in this mall includeshopper s Stop, Hush Puppies, Samsung, Nike etc. No new malls are expected to be completed in Q thereby taking the total retail supply for 2012 to 1.5 million sqft. values remained stable both in mall spaces as well as in high street locations. 4 Office rentals mentioned are for warm shell spaces Table 5: Retail s 5, Q High Street (INR/sqft /month) Mall Spaces STRATEGIC ADVISORY GROUP Page 5 (INR/sqft /month) Brigade Road 475 McGrath Road 350 Commercial Street 310 V.M. Road 420 Koramangala 80 Road 130 Koramangala 450 Indiranagar 100 Road 210 Malleshwaram 220 Jayanagar 11 th Main 250 ORR 100 Whitefield 175 Bannerghatta Road 95 Bannerghatta Road 200 Yelahanka 90 Mysore Road 120 Residential: Bangalore saw an addition of 4,568 units by Grade A developers in Q3 2012, which was 45% higher than the number of units launched in Q Majority of the launches were witnessed in SarjapurRoad micro-market followed by Bangalore North. Capital s remained stable with marginal increase in microlocations like Whitefield and Bangalore North. Table 6: Residential Capital s, Q Micro-location Capital (INR/sqft) Q-o-Q change Central 14,000-25,000 5% Off-Central 6,500-8,000 5% Bannerghatta Rd 4,500-5,000 4% Hosur Rd 3,300-3,600 3% Sarjapur Rd 2,300-5,000 6% Whitefield 3,500-4,000 6% Bangalore North 4,000 4,500 7% Tumkur Road 3,200-5,500 3% Mysore Rd 2,600-3,200 4% Kanakapura Road 3,500-4,500 4% Old Madras Road 3,500-5,000 5% 5 Retail s mentioned are for Ground Floor store of 1000 sqft with an efficiency of 80% for high streets and 65% for malls.

6 Table 7: Key Lease Transactions Company Building Location Developer Area (sqft) NDS Pritech Park ORR Primal Projects 400,000 Intuit Technologies Pritech Park ORR Primal Projects 200,000 Infosys JP IT Park Electronics City JP 175,000 Bosch RMZ Ecospace ORR RMZ Group 168,000 Amadeus Prestige Tech Park - 3 ORR Prestige Group 100,000 Allstate Insurance RMZ Ecoworld ORR RMZ Group 90,000 Carl Zeiss HM Info Park Bommasandra HM Group 90,000 Capgemini Prestige Shantiniketan Whitefield Prestige Group 80,949 Table 8: Key Residential Project Launches Project Location Developer Type Size / No. of Units SobhaMorzaria Grandeur Dairy Circle Sobha Developers Apartments 129 One Bangalore West Rajajinagar The Phoenix Mills Ltd Apartments 400 Skylark Arcadia - 2 Sadarmangala Skylark Mansions Pvt. Ltd. Villas 114 Prestige Fern Residency Haralur Road Prestige Group Apartments 1,900 Bella Greens Off Bannerghatta Road DLF Villas 100 Mantri Aura Bangalore North Mantri Developers Apartments 550 Prestige Misty Waters Bangalore North Prestige Group Apartments 552 STRATEGIC ADVISORY GROUP Page 6

7 CHENNAI Office: Chennai witnessed a fresh supply of 0.68 million sqft taking the total supply for 2012 to 2.78 million sqft. Nearly 90% of this supply was located in the CBD locations. Absorption was 0.8million sqft with major leasing activity seen in the SBD and OMR. Out of the 0.8 million sqft, 0.34 million sqft was SEZ space. Shriram The Gateway witnessed 0.12 million sqft absorption and Ramanujam IT SEZ saw absorption of 0.22 million sqft. With limited supply and steady absorption rental values remained stable in almost all microlocations. Nearly 0.8 million sqft office space is likely to be commissioned in Q4 2012, thereby taking the total supply for 2012 to 3.5 million sqft. Close to 5.0 million sqft of SEZ space is likely to enter Chennai market in the next two years. Table 9: Chennai Office s, Q Micro-Location (INR/sqft/month) Grade A Grade B CBD Off-CBD SBD OMR GST Retail: Chennai did not witness any new mall supply. However, the city witnessed the entry of international luxury brands likelouis Vuitton, Cartier and Jimmy Choo and BottegaVenetta. These brands have signed up for space in the 40,000 sqft 40,000 sqft luxury mall Bergamo on Khader Nawaz Khan Road in Q million sqft of retail mall space is likely to enter the city in the next 6 months which include prestige Forum Mall in Vadapalani, Phoenix Market City and PS Grand Mall in Velacherry and Ten Square Mall in Koyambedu. s remained stable except for marginal increase in some high street locations like Nungambakkam High Road and RK Salai. Table 10: Chennai Retail s 6, Q High Street (INR/sqf t/month) Mall Spaces (INR/sqf t/month) Khadar Nawaz Khan Rd 225 Whites Road 310 Nungambakkan High Rd 180 RK Salai 200 RK Salai 145 Mount Road 215 Pondy Bazaar 175 Adyar Main Rd 160 NelsanMani ckam Rd 250 Annanagar II Avenue 120 Velacherry 100 Purasawalkam High Rd 80 Residential: Chennai witnessed the launch of approximately 4,500plus new residential unitswith majority of the new launches in midsegment. OMR and GST continued to be the most active micro-markets for residential activity. However, with the construction of the Outer Ring Road suburbs in the West between NH-45 and NH-4 have also started witnessing launch of new residential projects. Capital values remained stable across micro-markets. Ready to occupy properties did better than under construction projects in terms of absorption. Table 11: Chennai Residential Capital s, Q Micro-location Capital s (INR/sqft) Q-o-Q change Central 15,000-25,000 5% Off-central 8,000-14,000 5% OMR 5,000-6,000 5% GST 3,200-4,000 0% NH-4 2,500-3,500 0% 6 Retail s mentioned are for Ground Floor store of 1000 sqft with an efficiency of 80% for high streets and 65% for malls. STRATEGIC ADVISORY GROUP Page 7

8 Table 12: Chennai - Key Office Lease Transactions, Q Company Building Location Developer Area (in sqft) Bank of New York Ramanujam IT SEZ Taramani, OMR TRIL 100,000 Cisco Ramanujam IT SEZ Taramani, OMR TRIL 100,000 Slash Support Shriram The Gateway SEZ Perungalathur,GST Shriram Properties 100,000 Saint Gobain TVH Agnito Kandanchavadi, OMR True Homes 58,000 EPT Engineering Central Square I Guindy SKCL 19,000 Plintron Espee IT Park Ekkattuthangal Ramaniyam 22,000 Table 13: Chennai - Key Residential Project Launches Project Location Developer Type Size / No. of Units TVH Quadrant Adyar TVH Apartment _ Space Aura Navalur Evocon Apartment 76 Opulence Poonamallee Golden Homes Apartment 815 SARE Crescent ParC OMR SARE Homes Villas 400 Vista Arcot Vadapalani Vista Spaces Apartments 28 STRATEGIC ADVISORY GROUP Page 8

9 HYDERABAD Office: Hyderabad witnessed a fresh supply of 0.64million sqft of Grade A office space in Q Nearly 61% of the supply was witnessed in PBD West.No SEZ supply entered the market during Q Key buildings commissioned included Millennium (70,000 sqft) in PBD West and Vista in SBD. The city witnessed an absorption of 0.5 million sqft of office space with PBD West contributing to almost 80% of the absorption. K. RahejaMindspace and AscendasAuriga located in Hitech City, My Home Hub in Madhapur were the key buildings which witnessed absorption in Q With limited fresh supply, rentals values across micro-markets remained stable. Nearly 0.6 million to 0.8 million sqft of Grade A office space is likely to enter the market by the end of 2012.No new SEZ supply is likely to enter the market in the last quarter. Key SEZ projects like Wave Rock by Tishman Speyer and Divyasree Orion are likely to be commissioned in Table 14: Hyderabad Office s, Q (INR/sqft/month) Micro-Location Grade A Grade B CBD SBD PBD (West) PBD Table 15: Hyderabad Retail s 7, Q High Street (INR/sqft/ month) Mall Spaces (INR/sqft/ month) M.G.Road 115 NTR Gardens 230 Begumpet 135 Banjara Hills 140 Banjara Hills 260 Panjagutta 140 Jubilee Hills 150 Kukatpally 140 Madhapur 275 Madhapur 135 Residential: With the amendment of G.O 45 by Government of Andhra Pradesh, new residential projects are likely to increase in Hyderabad. The first half of 2012 witnessed 75% lesser launches as compared to the same period in 2011 as a result of the government order. Over 4,000 units are in the pre-launch stage with majority of them concentrated in the western parts. Table 16: Hyderabad Residential Capital s, Q Micro-location Capital s (INR/sqft) Q-o-Q Change Banjara Hills 4,000-8,000 0% Jubilee Hills 4,000-7,000 0% Himayath Nagar 2,500-4,500 0% Maredpally 2,800-4,500 0% Begumpet, Somajiguda 2,900-4,900 0% Retail: Hyderabad did not witness any fresh supply of malls in Q However, the city witnessed the opening of Bharti-Walmart s first cash and carry store Best Price Modern Wholesale in Rajendra Nagar spread over 53,000 sqft. MadhapurGachibowli 3,000-5,500 0% Kukatpally 3,000-5,500 0% Kompalli 3, % 7 Retail s mentioned are for Ground Floor store of 1000 sqft with an efficiency of 80% for high streets and 65% for malls. STRATEGIC ADVISORY GROUP Page 9

10 Table 17: Key Office Lease Transactions, Hyderabad, Q Company Building Location Developer Area (in sqft) Vigilent Technologies RahejaMindspace Hitech City K Raheja 88,000 Ivy Computech Ilabs Hitech City Ilabs 30,000 Fire Fly NCC Corporate House Hitech City NCC 25,000 Team F1 My Home Hub Madhapur My Home Constructions 20,000 I Space My Home Hub Madhapur My Home Constructions 20,000 Table 18: Key Residential Project Launches, Hyderabad, Q Project Location Developer Type No. of Units Prajay Virgin County Maheswaram Prajay Engineer s Syndicate Apartments/ Villa 1,033 STRATEGIC ADVISORY GROUP Page 10

11 MUMBAI Office: Mumbai witnessed a supply of 2.5 million sqft thereby taking the total fresh supply for 2012 to 5.5 million sqft. Majority of this supply was in the eastern and western suburbs. Absorption of office space was close to 1.0 million sqft. Key building completed during the quarter is The Capital (1.25 million sqft) in BKC. Key lease deals include Rediffusion (30,000 sqft) in India Bulls Financial Center and Tata AIG (25,000 sqft) in Peninsula Business Park in Lower Parel. Table 19: Mumbai Office s, Q Micro-location * (INR/sqft/month) CBD Off-CBD BKC Western Suburbs Eastern Suburbs Navi Mumbai Note: Bare shell rental values are given in the above table. Retail: Mumbai saw no new retail space supply during Q values remained stable across mall spaces. Italian sports and lifestyle brand Fila opened its store at Korum Mall in Thane. Table 20: Mumbai Retail s, Q Micro-location High Street (INR/sqft/mont h) Mall (INR/sqft/month) South Mumbai Linking Road 800 _ BKC Western Suburbs Eastern Suburbs Navi Mumbai OUTLOOK The impact of the reform measures announced in the end of Q on the economy and the Real Estate sector are likely to be witnessed in the short to medium. Nearly 9.6 million sqft of Grade A office space is expected to enter the market in the above four cities by the end of With weaker hiring intentions demand for office space is likely to remain subdued in the Q However, demand for office space is expected to improve in the next 6 months to 1 year owing to policy reforms. Office rentals are likely to remain stable due to the new supply that is likely to enter the market in Q Retail segment is not likely to witness any significant addition to supply in Q in the four cities. Increase in FDI in retail segment will pave way for increased investments in the construction of malls thereby increasing supply in the medium to long term. With the government allowing 100% and 51% FDI in single and multi-brand retail several international retail giants are looking at entering the Indian markets. With the entry of new foreign retail players, tenant mix in malls is likely to undergo a change with newer anchors and retailers. Demand in the residential sector will improve in the short to medium term with interest rates expected to easefurther which will in turn lead to steady new launches in the short-term. Residential capital values are likely to appreciate in cities like Bangalore and Chennai due to consistent demand. STRATEGIC ADVISORY GROUP Page 11

CONNECT. Content VESTIAN QUARTERLY NEWSLETTER Q Executive Summary STRATEGIC ADVISORY GROUP. India: Economic Indicators

CONNECT. Content VESTIAN QUARTERLY NEWSLETTER Q Executive Summary STRATEGIC ADVISORY GROUP. India: Economic Indicators CONNECT VESTIAN QUARTERLY NEWSLETTER Q2 2014 STRATEGIC ADVISORY GROUP Executive Summary Content India: Economic Indicators India Real Estate Market Overview Bangalore Chennai Hyderabad Mumbai Outlook Office: