2017: THE INFLECTION POINT OF INDIAN REAL ESTATE. 7 July 2017

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1 2017: THE INFLECTION POINT OF INDIAN REAL ESTATE 7 July 2017

2 Executive Summary As GST is modern India s tryst with destiny, so is 2017 a red-letter year for Indian Realty, being witness to a multitude of policy measures. These range from RERA - the primary driver towards a more regulated, transparent and accountable realty sector, to GST- a key inflection variable for sunrise sectors such as Warehousing, Logistics and Manufacturing, to REITs which is a game changer for commercial assets. This paper seeks to analyse these key inflection points within the ambit of a till date constricted industry, as well as outlines its future outlook. India s hugely productive office & workspaces will witness a counter-balancing of the effects of global economic vagaries, Trump onomics, automation and dividends from India s policy reforms & demonetization. Office absorption will continue to see an upward trajectory, despite short-term setbacks. In 2019, a net absorption of 34.3 mn. sq. ft. (up from 33.4 mn. sq. ft. in 2016) is expected and once again IT/ ITes will emerge the probable hero. With the first likely REIT listing towards end 2017, institutional investors and HNIs will look keenly at commercial markets. 900 REIT worthy commercial Grade A assets equalling 280 mn. sq. ft. are estimated to be available across key cities. The potential of this investment, as and when it starts yielding, will be a key reflection point for office markets. Residences & Homes will be a key beneficiary of the big bang RERA (provided it is implemented true to form). With it we are on the cusp of ushering in an era of greater transparency and accountability across multiple stakeholders. Developers have already started aligning businesses to RERA guidelines and Brokers will need to follow suit, else both are likely to fall by the wayside. Having said that, a marginal dip in residential supply is forecasted in the near term, as only those developers capable of delivering on time will undertake newer assets. And why not, since penalties for late deliveries are steep, not to mention the added whiplash! Affordable Housing will continue to see healthy supply, with 1Q 2017 witnessing maximum number of new launches (35%) in the INR 3,000-4,000 per sq. ft. category across key cities. With the triumvirate of Modi, Jaitley and Naidu granting Infrastructure Status to affordable products, developers heave a slight sigh of relief on cheaper funding, including external commercial borrowings (ECB). Question to ponder - Since we are now a One Tax nation, can the days of a Uniform Affordability Code be far behind? Only time will tell! Modern Retail will evolve as hubs of enhanced experiences, which will be key for its inflection in order to counter balance the maelstrom of E-Commerce. The shifting experience of retailing may be attributed to: increasing disposable incomes, enhanced demographics, technology innovations, greater access to the web and use of smartphones as well as emergence of alternative payment systems. Demonetization has led to a less-cash economy and the consumer has adapted to it begrudgingly appears to be a strong year in terms of supply, with over 7.7 million sq. ft. expected to become shopper-ready. Good malls are witnessing moderate - good pre-commitment levels - ranging between 51-75% of leasing. The paper also looks at GST, and its impact on emerging sectors such as Warehousing and Manufacturing, set to witness increased investor interest - the recent IndoSpace platform investment by Canada Pension Plan Investment Board evidences enough. Post 1st July 2017, supply chain management and asset quality of warehouses should improve The Inflection Point of Indian Real Estate being launched on the sidelines of the 9th CII Real Estate & Infrastructure Conclave hopes the implementation of these gigantic policy changes in 2017, albeit slow and much awaited, will be seamless and advance the institutional development of India s hitherto cautionary real estate economy. The glass seems to be half full, and awaiting a top-up! Ramesh Nair CEO & Country Head JLL, India

3 Office Markets Office markets continued to look attractive with Bengaluru showing the lowest office market vacancy rate of 3.2% among all the top seven Indian cities in Q Bengaluru and Mumbai accounted for 60% of the total absorption during the quarter. IT/ITeS sector revenues were under pressure due to increase in wage costs, appreciating rupee and changes in the industries to which the Indian IT sector caters. However, with IT/ITeS companies looking to reskill employees, changing towards Agile model of software development and looking for alternative areas of growth, we feel that the impact on space requirements will be marginal. Technology is not only displacing current jobs, but also creating new ones. The impact of Trump s policies on hires in the US is minimal. On the real estate front, there has been no immediate change in terms of Request for Proposals (RFPs) floating in the market or the share of the IT sector in leasing or the type of buildings presently being built by developers. Also, India continues to be a cost-competitive market versus its other counterparts, which is a critical strength. REITs markets are likely to kick-start in 2017 and will be a major inflection point for office markets.

4 Vacancy and Rents in Key Seven Cities Stock (mn sq ft) Vacancy (%) Rent (INR psfpm) CBDs % 124 SBDs % 102 Suburbs % 49 Pan - India % 77 1Q17 NCR Delhi % 78 Kolkata % IT-driven cities continued to observe historically low vacancy levels and the Pan-India vacancy levels were at 14.5% in Q Higher net absorption relative to new addition, caused vacancy to reduce by 60 bps in Q Hyderabad % 50 Chennai % % 15.0% % % New Completions Net Absorption 2016 Vacancy Source: Real Estate Intelligence Service (JLL), 1Q : THE INFLECTION POINT OF INDIAN REAL ESTATE 2017F 2018F 2019F 0.0% Vacancy (%) % Supply, Absorption and Vacancy Trends : THE INFLECTION POINT OF INDIAN REAL ESTATE 50 Mumbai Pune Bengaluru % 21.6 India Office: Market Dashboard New Completions/Absorption (million sq ft) Key Trends % 5.6% 22

5 As can be seen below, across cities, IT corridors were trading at vacancy levels lower than the city level average vacancy. This indicates that the demand for space by IT companies continued to be healthy. The maximum occupier share in total lease transactions was also taken up by IT & ITeS companies (41%), followed by manufacturing (17%) in No other industry is as space intensive as IT & ITeS. Other sectors like logistics often house their staff out of warehouses thus limiting their requirement for quality office space. This will ensure that IT & ITeS sectors will hold the largest share in leasing transactions. JLL-REIS Office Rental Value Index Rents in Bengaluru stood well above their previous peak followed by Pune & Chennai. Hyderabad is about to reach its peak rental level in upcoming quarters. Better infrastructure, affordable rents and good quality large floor plates have attracted many IT and consulting occupiers to Tier II cities like Hyderabad and Pune. 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% City Level Vacancy v/s Vacancy in IT Corridors (Superior Assets) REIS 1Q17 RENTS DECLINING DECLINE SLOWING RENTS RECOVERING Rental Value Index Q17 Bengaluru -17.7% 3.3% 10.8% 5.3% -0.6% 0.8% 6.8% 8.1% Mumbai City -34.3% 0.8% 1.1% 0.8% 0.5% 0.2% -1.6% -0.3% 61.5 Delhi City -41.6% 2.2% 3.2% 1.3% 0.0% 0.0% 0.5% -2.4% 58.2 Mumbai Suburbs -34.3% 0.0% 7.4% 1.1% 2.1% 0.6% 3.0% 2.3% 77.9 Gurgaon (Prime) -31.1% 2.8% 11.8% 5.7% 5.0% 1.0% 2.8% 0.3% 84.6 Gurgaon (Off Prime) -38.2% -2.4% 9.8% 4.4% 2.1% 0.7% 0.0% 1.4% % 0.0% NCR Delhi NH8 - Prime Mumbai Navi Mumbai - Prime Bengaluru SBD - Outer Ring Road Chennai SBD OMR Pune SBD - East Pune Hyderabad Hitec City City Level Vacancy Vacancy in IT Corridors Source: Real Estate Intelligence Service (JLL), 1Q17 Noida -16.6% -9.0% 3.3% 2.7% 3.6% 0.2% 4.3% 3.1% 85.6 Chennai -22.4% 0.0% 6.4% 4.9% 4.4% 0.6% 3.5% 3.3% Pune -20.7% 0.0% 3.4% 7.3% 6.8% 1.8% 10.6% 7.1% Hyderabad -14.0% 0.0% 4.1% 5.1% 1.1% 1.1% 4.6% 6.8% 97.2 Kolkata -27.4% 0.0% 5.7% 8.2% -0.3% -0.5% 3.4% 1.0% 77.6 Note: Mumbai City includes CBD, SBD Central, SBD BKC and SBD North. Mumbai Suburbs includes Eastern and Western Suburbs. Delhi City includes CBD and SBD of Delhi. Source: Real Estate Intelligence Service (JLL), 1Q17 Base for indexing - Rental levels of 3Q08 Occupier Share in leasing (by Industry) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 3% 4% 3% 8% 4% 3% 7% 7% 10% 4% 10% 3% 5% 15% 7% 26% 29% 15% 24% 17% 22% 17% 17% 15% 12% 11% 11% 36% 8% 39% 16% 14% 12% 15% 41% 33% 36% 38% Miscellaneous E-Commerce Consultancy Business Manufacturing/Industrial Telecom, Healthcare-Biotech, Real Estate Construction & Allied Industries BFSI IT & ITES Source: Real Estate Intelligence Service (JLL), 1Q17

6 Industry wise share in future leasing IT/ITeS companies continue to occupy a majority share in the presently active Request for Proposals (RFPs) for quality office spaces across the country. 34% 53% IT Sector- US Policy Impact 3% 3% 4% Miscellaneous Manufacturing/ E-Commerce Consultancy Industrial Business Source: Real Estate Intelligence Service (JLL), 1Q17 Telecom, Healthcare-Biotech, Real Estate Construction & Allied Industries BFSI IT & ITES Share of IT/IT SEZ in Built Stock and Upcoming Supply (from ) 100% 90% 80% 28% 32% 70% 60% 50% 40% 30% 72% 68% 20% 10% 00% Stock Upcoming Supply While it is no surprise that 72% of the built office stock is IT/IT SEZ, going forward too, IT/IT SEZ developments will be major contributors to the upcoming supply. 480 mn sq ft 145 mn sq ft Source: Real Estate Intelligence Service (JLL), 1Q17

7 Indian IT & ITeS Sector The Indian IT & ITeS sector revenues are under pressure because of - Increase in wage costs - Appreciating rupee - Significant changes in the industries to which the Indian IT sector caters Technology and automation are affecting jobs at the lower end of the value chain. IT companies need to reskill their employees (60-70% employees need to be reskilled, as per NASSCOM estimates) and also invest in newer technologies and areas like cloud computing, machine learning, artificial intelligence, data sciences, robotics, big data analytics, social learning and digital marketing Indian IT-BPM revenue is expected to grow at a rate of 11% CAGR over the next decade, indicating that the long term Indian IT growth story is intact IT firms are now working towards the Agile model of software development, which enables them to take up multiple smaller projects, instead of focusing on mammoth projects for longer durations 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 00% 5% USD Bn 95% Because of broad macro trends, there might be a temporary contraction of demand from companies offering only IT services. However, companies active in the Business Process Management (BPM) space shall continue to expand Indian IT/BPM Revenue Digital Tech Traditional Tech 350 USD Bn 62% 38% 2025 Estimated However, for now, it sure seems to be a survival of not only the fittest but also the most adaptable Source: NASSCOM Indian IT & ITeS Sector: The Long Term Growth Story The long term growth story for IT/ITeS sector is strong because: The ability of Indian firms to adopt to newer technologies. Various Indian IT giants have started incubating smaller startups focusing on newer technologies. Newer technologies and automation initially result in a temporary reduction in fresh hiring, but later on, they lead to a demand for outsourcing the management of processes and systems Indian IT firms slowly and steadily, moving away from the sole USP of cost arbitrage towards other bigger benefits The Trump Effect 6 Easy availability of quality talent as well as presence of a young population (65% population under the age of 35) In terms of office rental values, Indian IT submarkets continue to remain cheaper than most of the IT corridors in Asia Pacific Technology is not only displacing existing jobs but also creating new jobs. Ability of Indian IT firms to reskill their employees for new jobs will decide their growth trajectory going forward The Protect and Grow American Jobs Act is an executive order which proposes important changes in the eligibility requirements for H1-B Visa applications like an increase in minimum wage to $130,000, which is more than double of the present limit of $60,000. The change ensures that the H1B programme is not misused to displace American workers and used only to complement American workers. USA offers 65,000 H1B visas globally every year, of which a majority are used by Indians, especially from the IT sector. An additional 20,000 H1B visas are issued for international students who have an American Masters Degree. These visas are then allotted through a lottery. While there is no change proposed in the 65,000 limit, the bill proposes to remove the Masters Degree exemption. 4 5 Considering the proposed changes, IT companies are changing their hiring strategies, so as to reduce their dependence on employees under the H1B visa programme by hiring more local talent in the USA. The people which the USA invites under the H1B programme form only percent of the 160 million strong American workforce. Also, the unemployment rate among skilled workers is around two percent, which points towards a shortage of skilled talent in the USA. As per NASSCOM estimates, Indian IT firms support over 400,000 jobs through their USA operations and have also paid over $20 billion dollars in taxes between 2011 and 2015.

8 REITs - The Key Change Driver REITs is an investment tool that owns and operates real estate related assets and allows individual investors to earn income through ownership of commercial real estate without actually having to buy it. The concept is similar to mutual funds and provides its investors various income streams and long-term capital appreciation akin to mutual funds. In India, the first REIT listing is expected this year. REITs Impact on Commercial Assets: Increased Liquidity: - Easier exit for Developers - Retail investors can invest in commercial assets as they get listed - Global Institutional Investors can also enter and exit Indian commercial assets Higher Yield Assets: Investors can hope to earn higher yields (810%) compared with current residential yields (3-4% average) Superior Quality Assets: With Investors looking at superior asset quality assets, we will see an overall increased focus on Facilities Management Business as well as improved standards of design and construction quality CBDs and SBDs to see maximum Investments: With lower vacancies, superior quality buildings in CBDs and SBDs are likely to see maximum REIT worthy assets As of 2016, over 500 REITs exist across various countries, with total market capitalisation of more than USD 900 billion. Source: In India, JLL estimates 280 mn. sq ft REIT-worthy office assets across the key seven cities and the Grade-A universe is only expected to grow. 28% 18% 16.5% 14% 11% 10.5% 2% REIT worthy commercial assets (% of total Pan India stock) The Key Inflection Point - RIETs City wise REITs stock (Grade A Commercial) Bengaluru NCR Delhi Mumbai Chennai Pune Hyderabad Kolkata Source: JLL Research 2017: THE INFLECTION POINT OF INDIAN REAL ESTATE 2017: THE INFLECTION POINT OF INDIAN REAL ESTATE

9 Outlook for Office Markets US Policy Impact: For now, it is an evolving and a dynamic situation. However, it is highly unlikely that USA will be able to completely do away with outsourcing. On the real estate front, there has been no immediate change in terms of RFPs floating in the market or the share of the IT sector in leasing or the type of buildings presently being built by developers. Also, India continues to be a cost-competitive market versus its other counterparts, which is a critical strength. REAL ESTATE OUTLOOK - IMPACT OF AUTOMATION However, there is no denying the fact that Indian IT companies do need to brace themselves to evolve and adapt to the triple force of automation, new technologies like Artificial Intelligence and protectionism, all at the same time. Near Term (1 year) Medium Term (2-3 years) IT/ITeS and BFSI to dominate leasing: Despite the emergence of newer sectors like e-commerce, logistics, manufacturing etc. we expect the IT & ITeS sector along with BFSI backend operations to continue to occupy a significant share in the overall office spaces pie. REITs impact positive: With the likely introduction of REITs later in the year, we will see higher liquidity in commercial assets and rentals will look healthy. It will be a key inflection point. Some IT companies may revise real estate requirements downwards by 5-7%. Automation will lead to lower fresh hires or job losses. But we expect IT/ITeS fraternity to adapt through reskilling and exploring new business avenues The impact of growing automation will be felt. Large Occupiers (IT/ ITeS companies) can put pressure on developers to lower rentals. Lease terms may be shorter Outlook City wise outlook: Rents are likely to rise faster in low vacancy markets of Pune, Bengaluru and Hyderabad in a range of 6-8% y-o-y, while select other sub-markets such as Suburbs of Mumbai, NH8 of NCR and SBDs of Chennai will also fall into this category. The tier II cities which are now showing momentum in the absorbtion of spaces, should build more to meet the growing demand. Healthy Supply Addition: Approximately 40 million sq ft of new space will be added each year from Current rentals will remain stable as vacancy across is at acceptable 15% levels Stability in rentals with the possibility of a marginal 5-7 % revision downwards Note: The overall impact of automation will be negligible in the commercial real estate markets as developers will adjust supply to recalibrate demand from large IT/ITeS companies

10 Residential Markets Residential markets witnessed the impact of the demonetisation drive with a slowdown in sales in Q However, units launched witnessed a noteworthy q-o-q rise of 11.8% compared with Q Pune was the highest contributor to quarterly supply across the seven cities in Q1 2017, followed by Mumbai and Bengaluru. Most launches were seen in the mid-range and affordable categories across all the cities. Going forward, the implementation of RERA by state governments will be the key inflection point for residential markets and we expect a slow and steady rise in capital values. Initially, this will be a reflection of reduced supply, as only those developers confident of completing projects timely will undertake new projects. Later, as the market becomes more transparent and well regulated, end-users and investors will find their way back, keeping capital values up.

11 India Residential Supply and Sales Trend Number of Residential Units 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, ,80,000 4,60,000 4,40,000 4,20,000 4,00,000 3,80,000 3,60,000 3,40,000 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 New Launches Units Sold Unsold Units Source: Real Estate Intelligence Service (JLL), 1Q17 Number of Residential Unsold Units In Q1 2017, Bengaluru was the biggest contributor to quarterly sales with a 26.6% share and was followed by Mumbai with a 19.2% share. Pune was at the third spot with its contribution to quarterly sales being 18.9%. Since 2014, new launches across major cities of India declined. Developers continued to focus on offloading unsold inventory rather than on launching new projects. Residential sales continued to dip over the last three years on the back of home buyers anticipating probable price correction saw a rise in unsold inventory due to shrinking demand. However in 2016, it recorded a slight dip due to a reduction in supply. The demonetisation drive impacted sales in 1Q17 and there was an overall slowdown in construction activity. In 1Q17, units launched witnessed a noteworthy q-o-q rise of 11.8% compared with 4Q16. Pune was the highest contributor to quarterly supply across the seven cities in 1Q17, followed by Mumbai and Bengaluru. Most launches were seen in the mid-range and affordable categories across all the cities. Key Trends

12 The Key Inflection India Residential Capital Value Index Point: RERA Thane-Navi Mumbai and Pune continued to be the front runners on capital value appreciation. NCR and Noida recorded reduced unsold inventory q-o-q after a prolonged stagnancy. Real Estate (Regulation and Development) Act, 2016 (RERA) Highlights 1 Developer can t make any changes to the plan without the written consent of the buyer The property will have to be sold to buyers on the basis of carpet area 2 Source: REIS, JLL 1Q17 Capital Value Index (from Peak of 3Q08) Capital Value Index (from Trough of 2Q09) Average Sales Rate Current Sales Rate Unsold Units Peak Source: Real Estate Intelligence Service (JLL), 1Q17 Note: Figures represent the top seven cities of India - Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata. Current Unsold Units City 1Q17 1Q17 1Q08-1Q17 1Q17 1Q08-1Q17 1Q17 NCR-Delhi % 2.7% 184, ,169 Gurgaon % 3.1% 31,620 26,308 Noida and Greater Noida % 2.5% 107,231 93,051 Mumbai City % 7.0% 46,428 43,915 Thane % 12.9% 9,329 8,860 Navi Mumbai % 5.5% 27,216 25,888 Bengaluru % 9.4% 79,960 71,677 Chennai % 6.7% 58,156 40,933 Hyderabad % 5.6% 22,276 22,276 Kolkata % 4.8% 27,175 23,522 Pune % 11.4% 36,669 36, Registration is mandatory for all commercial and residential real estate projects where the land is over 500 square meters or includes eight apartments & which are under-construction If the project gets delayed the developer will have to pay interest on the amount paid by buyer. It is compulsory for a state to establish a State Real Estate Regulatory Authority Failing to register a property will attract a penalty up to 10% of the project cost and a repeated violation could send the developer to jail Every phase of the project will be considered a standalone real estate project and will need to obtain separate registration The developer will have to place 70% of the money collected from a buyer in a separate escrow account to meet the construction cost of the project If the buyer finds any shortcomings in the project he can contact the developer in writing within one year of taking possession 4 6 8

13 RERA Impact on Stakeholders The Real Estate Regulatory Act (RERA) bill will have an impact across all stakeholders in the real estate markets. Overall capital values are likely to go up across most cities as there will be a slow down in supply, while demand will remain robust. A more regulated, transparent market will also see the eventual return of the investor, as he will see price rise accompanied by with increased sales activity. Affordable Housing 1 IMPACT ON DEVELOPERS Can t Sell / Market / Advertise the project without registering the company with RERA 70% of the Sale proceeds to be kept in separate account and the same can be utilised only for the construction of the project Developers can t charge for area outside the walls IMPACT ON BUYERS Increased transparency in transactions Informed buying decision on account of easy access to information about the project Timely possession of property with no cost over runs and much greater mental peace 2 Beneficiary of Policy Initiatives The applicable exemptions for affordable housing will now be recognised on the basis of carpet area of 30 sq. m. and 60 sq. m. instead of on the basis of saleable area. The 30 sq. m. limit will only be applicable within the corporation limits of the 4 major metros. For fringe areas of these metros and all other cities, it will be 60 sq. m. on carpet area. This will effectively serve to increase the number of projects falling under this segment. Promoters of affordable housing projects have been provided a cushion of two additional years for project completion compared with the earlier 3 year period. A 4% interest rate rebate on housing loans up to Rs. 9 lakh is available. The rebate stands at 3% on loans up to Rs. 12 lakh. The joint development s (JD s) liability to pay capital gains tax will be in a year after the project is constructed. This will be beneficial for land owners and land prices can ease. This benefit can be passed on to home buyers. The government has granted infrastructure status to affordable housing. Developers can enjoy cheaper sources of funding, including external commercial borrowings (ECBs). As per Ministry data, while the construction proposals involve million houses and INR 29,426 crore is the Central Assistance, till now INR 9,256 crore has been released by the centre. But, due to delay in land acquisition, only 1.49 lakh houses have been completed under PMAY (Urban) in Another 693,130 houses are under construction. IMPACT ON INTERMEDIARIES / BROKERS Can t Sell / Market / Advertise the project without registering the company with RERA All advertisements, marketing material of the project should have the registration number The real estate agent shall maintain books of accounts, records and documents separately for each real estate project 3 IMPACT ON INVESTORS / PE FUNDS Availability of data will protect them from misrepresentations of developers Transparency and strong regulations will see the return of the investor PE Funds with a long term perspective will also relook at investing in the market 4 % Number of Units in Total Units Launched 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 3% 8% 8% 8% 19% 22% 27% 3% 3% 6% 7% 30% 16% 23% 13% 2% 5% 5% 7% 17% 14% 29% 23% 1% Price Category Wise Launches 1% 4% 3.4% 2.8% 2.6% 3.3% 4% 9% 4.9% 5.7% 8.2% 4.7% 3.4% 8.6% 4% 2.1% 4% 6.9% 8.4% 11.8% 8.3% 6.5% 4.0% 20.5% 6.6% 17% 23% 20.2% 22.0% 20.2% 20.2% 15.6% 21% 25.1% 25% 36.1% 23.5% 26.5% 38.2% 28.0% 24% 18% 25.4% 24.1% 22.4% 22.5% 16.8% 17.9% 22% 24% 18.4% 9.6% 13.2% 10.8% 10.2% 7.0% 2.1% 0% 0% 0.0% 0.4% 1.0% 2.6% 6.4% 12.2% 9.5% 5.7% 4.4% 16.0% 22.2% 20.1% 17.9% 31.1% 35.0% 12.3% 4.7% 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Maximum new launches (35%) were in the Rs. 3,000-4,000 psf category in 1Q2017 showing the appetite for affordable homes. More than 15,000 10,000-15,000 7,500-10,000 5,000-7,500 4,000-5,000 3,000-4,000 2,000-3,000 Less than 2,000 Source: REIS 1Q2017 Note: All residential prices are in Rs. psf

14 Outlook for Residential Markets Projects with smaller unit sizes will witness more traction than projects with larger unit sizes. With the implementation of RERA, we expect a reduction in new launches across all cities as only those developers confident of meeting timelines will undertake new projects. With reducing new launches and a simultaneous dip in unsold inventory we should see a steep appreciation in capital values. Capital values will rise across all cities in the near term, keeping in mind the inflation delta. In NCR however, where there is an oversupply, we expect to see stability in capital values. Post RERA, major developers are likely to enter into joint venture partnerships or undertake joint development with smaller developers to complete stalled projects. Transparency in the market is expected to increase. Home loan rates will look soft in the near future and this will give a boost to residential markets. In its recent monetary policy announcement on 7 June 2017 the RBI, has reduced the amount of money, banks have to set aside (as security) on home loans. Already banks like SBI have started lowering home loan rates. Mid-Premium Category Impact: A Perspective The impact of slowdown in the IT/ITeS sector on demand for mid-premium residential housing is likely to be felt-specially in Bengaluru. If this bracket of consumers faces a serious risk of getting pink slips, there is a possibility that the recovery of residential sector in the mid-premium category will be delayed. JLL India s REIS data on project launches over the last five years confirms this linkage here. The price category that middle management employees typically target are apartments in the price range of Rs. 4,000-10,000 per sqft, which contributed close to 45% of the total project launches on an average in the five-year period until 1Q2017. Price-category distribution of residential projects launched (quarterly average of last 5 years until 1Q17) Outlook 20% 26% 21% 18% Price-category targetted by middle managers 2% 6% 5% 4% Less than 2,000 2,000-3,000 3,000-4,000 4,000-5,000 5,000-7,500 7,500-10,000 10,000-15,000 More than 15,000 Source: JLL REIS 1Q2017

15 Retail Markets The future of retail is becoming increasingly exciting with experience being rendered the greatest emphasis by various stakeholders. This variety of experience will be the key inflection point for the success of malls, with food and beverages and entertainment facilities increasing in importance. Innovative developers are introducing new entertainment options in the malls and retailers are trying to merge online experiences with offline ones to enhance the experience of the consumers. This has been made possible with technological innovations. On a pan-india level, against the net supply of -0.2 million sq. ft., an absorption of 0.2 million sq. ft. was recorded in Q Vacancy in superior Grade A malls was at a minimal 2% in Chennai. Mumbai vacancy levels were at 8% and Bengaluru and NCR were at 5% and 10% respectively. India s overall vacancy remained unchanged at 14.8% in 1Q17.

16 Key Trends Completions / Absorption (million sq ft) Vacancy in Operational Malls Superior Grade Average Grade Poor Grade One completion and six mall withdrawals (four in NCR and two in Pune) were recorded across the country in 1Q17, taking the total retail stock down to 74.6 million sq. ft. Innovation required from retailers as well as developers On a pan-india level, against the net supply of -0.2 million sq. ft., an absorption of 0.2 million sq. ft. was recorded in Q Strata selling by developers, poor mall management and average tenant mix resulting in lack of demand led to failure of average malls Successful/ Superior grade malls, however, continued to witness low vacancy levels across cities Across the cities, increased private equity interest in retail assets was observed Key retailers already present in India, continued with their expansion plans. Dutch apparel brand, Scotch & Soda entered India with their first stores in Mumbai and NCR. Supply, Net Absorption and Vacancy of Retail Space in India F 2018F 2019F NCR Delhi 15% 44% 7.7 New Completions Net Absorption Vacancy Note: New completions refer to the net completions i.e. difference in the stock positions of the current and the previous quarter. Figures cover India s seven metropolitan cities - NCR-Delhi, Mumbai, Bengaluru, Chennai, Hyderabad, Kolkata and Pune 5.6 Grade-wise Performance in Operational Malls Mumbai Bengaluru Chennai Pune Hyderabad Kolkata India 10% 8% 5% 2% 14% 3% 12% 9% 18% 7% 23% 31% 14% 16% 15% 39% 71% 41% 46% 17% 39% 41% 25% 20% 15% 10% 5% 0% Vacancy (%) Source: JLL, REIS 1Q17 Retail Real Estate Sector Construction Status In terms of supply, 2017 appears to be a strong year, with over 7.7 million sq. ft. of net supply expected to come on stream The good malls are witnessing moderate to good precommitment levels ranging between 51%-75%, whereas the average malls are seeing poor pre-commitments of 0%-50% Key retail completions lined up for 2017 include the RMZ Mall in Bengaluru, Seawoods Grand Central in Mumbai, Palladium Mall in Chennai, ICC Mall in Pune, DLF Mall and Wave Hub Mall in NCR Delhi Of the total retail supply expected in 2017, 48% is in the ready for fit-outs stage while 52% is in the % structure ready stage By end 2017, NCR Delhi will have a Grade A retail stock of 27.4 million sq. ft. while Mumbai is expected to have a stock of 19.1 million sq. ft. for Grade A retail space Construction Status of Future Supply of Retail Malls ( ) Stages of Construction for Expected Supply 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 48% 52% 18% 68% 11% 47% 31% 22% 3% 2017F 2018F 2019F Ready for Fit-Outs % Structure Ready Less than 50% Structure Ready Excavation / Upto Plinth Proposed Source: JLL, REIS 1Q17

17 Redefining Retail Spaces - Enhancing Physical Experience SEAWOODS GRAND CENTRAL, Navi Mumbai is part of a Transit-Oriented development, around the Seawoods -Darave railway station comprising: 800,000 sq. ft. retail space in the first phase and another 200,000 sq. ft. in the second phase Office with 4 million sq. ft. GFA coming up as part of the 40 acre project Multiplex and Entertainment zone in its second phase Shopping malls have become an inevitable part of our society and community. They have become more of a social and entertainment destination than a destination only for shopping The thrust of successful malls is now much more on overall experience and enhanced customer service standards. From being shopping destinations to entertainment centres to food destinations, shopping malls across the world are being looked upon as one-stop destinations for a day s outing. And this holds especially true for India. The brick and mortar malls would need to do much more than having a collection of brands. Food-Entertainment Cinema (FEC), is now an essential feature of a big destination mall, as it draws families to the mall. It is likely to be the main anchor in malls. There will also be an increase in entertainment options where diverse formats and scales of entertainment will emerge. Few malls which have devoted entire floors to F&B and food courts are Oberoi, R City, Orion and Xperia mall in Mumbai. MALL OF INDIA, Noida The retail, dining and lifestyle centre spread across 7 floors Mall-wise allocation for Entertainment and F&B Comprising 5 Customized Shopping Zones - Market Place, International Boulevard, The High Street, Family World and Leisure Land 7 screen Multiplex 10% of total BUA dedicated to F&B and 20% to entertainment options like Ski India, Fun City, Smaash and multiplex Select City walk Delhi DLF Promenade Delhi High Street Phoenix Mumbai DLF Mall of India Noida Phoenix Market City Whitefield Orion Bangalore Phoenix Market City Pune Inorbit Malad Mumbai 13% 16% 15% 21% 13% 30% 16% 16% Entertainment 13% 20% 6% 11% 11% 10% 8% 7% SELECT CITYWALK, New Delhi: 1.3 million sq. ft. of Integrated upscale shopping comprising Approximately 6 lakh sq. ft. of retail space 3 floors of office space Approximately 1 lakh sq. ft. of service apartments India s first 6-screen multiplex F&B Fashion Convenience 55% 56% 58% 53% 51% 41% 59% 58% 9% 3% 14% 8% 12% 13% 9% 1% 2% 1% 4% 1% 6% 3% 3% 1% Electronics LULU INTERNATIONAL MALL, Kochi: 2.5 million sq. ft. upscale retail destination with Home & Related 7% 1% 2% 5% 5% - 4% 11% Approximately 1.7 million sq. ft. retail space 5,000 sq. ft. ice skating rink 9-screen multiplex 2,500 seater food court Misc. 1% 3% 1% 1% 2% 3% 1% 6% Note: Space allocation percentage in these malls dates back to 4Q16. Some allocation percentages may differ from the present. Source: JLL Research 4Q16

18 Redefining Retail Space: Experience as Inflection Point Retail Spaces: Technology Enhancing Experience Retail industry in India is witnessing an increased focus on leveraging technology across functions of merchandising, supply chain, store operations, Omni-channel operations, customer engagement and fulfilment. Technology: Dynamic and Unstoppable has significantly impacted consumers shopping patterns: the power that it hands to consumers is arguably having the greatest impact on retailers and retail spaces. Retailers: In this increasingly digital world retailers are finding ways to use technology to augment the physical experience of customers. Both retailers and retail spaces have to contend with a growing urban population and one that is increasingly knowledgeable and demanding. Shopping Centers/Malls: Technology and data captured and analysed with the help of technology can do wonders for effective and efficient mall management. It can make physical shopping more interesting by deploying technology which benefits the mall, the customers and the retailer. Changing incomes and demographic profiles of consumers Growing access to the internet and greatly increased use of smartphones Emergence of alternative methods of payment Emergence of varied forms of entertainment and availability of F&B options Technological innovations Growing health and environmental consciousness Rising complexity of decision- making for consumers Retail is being redefined for every stakeholder viz. retailers, investors, developers and consumers in the real estate sector. This redefining has been a result of the pace at which the experience of retailing has been changing over the last few years. The change in experience may be attributed to: Redefining of Retail Places: Technological advancement and digital innovations have ushered new life into retail spaces by integrating physical and digital experiences. HomeLane.com, India s leading online provider of home fit-out solutions, has launched. Space Craft, the world s first virtual design platform that allows customers to visualize a furnished 3D home in reality. Use of Wi-Fi Beacons and Mobile Applications (apps) To customize brand offers INNOVATIVE RETAIL TECHNOLOGIES Smart Shelves Automatically monitor inventory in stores and notify the manager Retail-tainment- bringing leisure to shopping: By clubbing various fun activities viz. sports and gaming parlours, movie theatres and children s play area with shopping Inorbit Mall hosted Baccha Bollywood - film making workshop and an International Clown Festival, a huge hit among all age groups. Smart Mirrors Help enhance shopping experience and offers convenience for shoppers Digital Signage Push ads and price changes to stores in real-time, which creates targeted sales for consumers. Location Based Targeting To identify target customers and offer a loyalty/reward solution which is in line with customer expectations MAPS Technology Helps mall managers in handling marketing campaign displays and mall management teams in carrying out large scale maintenance work Intelligent Dashboards and Reports Points to the correlation between footfalls and customer spends on any given day Food-Entertainment-Cinema (FEC): This is increasingly becoming an integral part of the malls and tenant mix and allotment of space for FEC components has increased remarkably in malls. Ambience Mall, Gurgaon a destination mall has dedicated approximately 20% of the mall space to F&B and FEC components. Mall of India, Noida has dedicated approximately 30% of the mall space to F&B and FEC components.

19 Outlook Outlook For Retail Markets POLICY SUPPORT REQUIRED The government has to facilitate growth by preparing clear policies for the retail sector and creating retail zones thereby reducing infrastructure bottlenecks. Recent FDI retail policy and state-level retail policies, where the government is taking up the role of a facilitator to create an environment conducive to the retail business, are steps in the right direction. While consumer adoption, technology progress and retailer push have been the key drivers, government initiatives will further propel omni-channel retailing. DEMONETIZATION IMPACT ON TECHNOLOGY ADOPTION The demonetization drive has catapulted the digitalization momentum in the Indian economy resulting in a spectacular growth of mobile wallets and card payments. While the economic indicators have dipped temporarily, the impact is not likely to be long term. The impetus for digital payments will accelerate the technology adoption rate in the country. CO-EXISTENCE OF ONLINE AND OFFLINE CHANNELS A right combination of omni-channel will be the way forward. We would see waves in both directions, i.e. movement from online only to omni-channel as well as offline only to omni-channel. Investment in technology infrastructure will enhance the quality of consumer experience as well as the security of online transactions. This will attract more consumers to online retail. REITS - THE FUTURE KEY DRIVER With the advent of REITs in the near future, the quality of malls is expected to improve and the concept of strata sale of properties is expected to reduce considerably. GST IMPACT With GST, rationalization of taxes at different levels, improvement in ease of doing business, as movement of retail goods and raw materials will be easier. Reduction in final prices of certain items, due to a reduction in transportation costs as well as the cost of raw material post-gst will strengthen sales.

20 Emerging Sectors GST impact on Warehousing and Manufacturing GST, the biggest tax reform independent India has ever witnessed, will have a positive impact on supply chain management and the quality of warehousing assets across India. It will also lead to larger warehouses and open up new warehousing destinations as tax efficiency will no longer be the motivation for the location of a warehousing hub. Warehouses are expected to have economics of scale thus increasing Per Cubic Metre storage efficiency of warehouses. While the overall impact of GST will be positive for the manufacturing sector, the exclusion of Petroleum from GST will be a dampener. Petroleum products such as high-speed diesel, are common fuels used in various manufacturing processes. Emerging Sector - REITs The first REIT listing is likely towards end 2017 and the biggest impact will be on commercial assets. Some of the largest developers will be seen keen to list their assets. Overall we expect a greater push towards asset maintenance and greater liquidity for developers.

21 GST Highlights CST Entry Tax Excise Duty ADC Service Tax GST Levies GST to subsume multiple indirect taxes Luxury Tax CST CVD Lottery Tax Goods & Services Tax (GST) is a multi-stage tax on domestic consumption and will be charged on all taxable supplies of goods and services in India except those specifically exempted. India has adopted a four-tier tax structure of 5%, 12%, 18% and 28%. The rate applicable on most products will be 18%. GST Rates Building Bricks 5% Iron and Steel 18% Commercial Lease Agreement 18% Cement 28% Wall Paper 28% Paints and Varnishes 28% Wall Fittings 28% Plaster 28% Ceramic Tiles 28% Sanitary Ware 12% Works Contract 12% F&B 18% Budget Hotels (Tariff ) 12% Budget Hotels (Tariff ) 18% Luxury Hotels (Tariff above 5000) 28% Restaurants (Non Air conditioned) 12% Restaurants (Air conditioned) 18% Small Restaurants (Turnover less than 50 lakh) 5% Restaurants in Luxury Hotels 28% Source: Post GST- Emerging Warehousing Locations Established Hubs NCR - Delhi Mumbai Chennai Bengaluru Kolkata Hyderabad Pune Ahmedabad Ludhiana Upcoming Hubs Nagpur Kanpur / Lucknow Guwahati Bhubaneshwar Vijayawada Coimbatore Kolhapur JAIPUR Indore Jaipur Kochi Patna Vapi LUDHIANA NCR DELHI Proximity to Consumption Centres Traditional warehousing locations are either seaport led, consumption led or facilitator-led. The upcoming hubs are either large manufacturing hubs themselves or located within 3-4 hours of travel time to a large density of population, providing proximity to consumption centres, rather than providing tax efficiency. KANPUR LUCKNOW The Centre of Gravity Dynamics Post the GST implementation, if any manufacturer has uniform sales distribution/consumer market across the country and wants to have a single distribution centre (DC) to cater to the entire country, the DC would be typically located near the country s geometrical Centre of Gravity (CG) (i.e., equidistant from all parts of the country). However, the consumer demand and market size of each product type is very different and complex. The larger the market size, the greater is the pull force of the CG toward it. Consumer demand typically is skewed more toward the northern, western and southern regions of the country, thus pulling the CG toward it. The Landscape of Indian Warehousing GUWAHATI GST - The Inflection Point for Warehousing REDUCED COST OF PRODUCTION Impact: Reduction in tax cascading may lead to lower cost of production, which can eventually be passed on to consumers. AHMEDABAD INDORE PATNA KOLKATA QUICKER SUPPLY HUB AND SPOKE TO RULE Impact: State-border check points for scrutiny and location based tax compliance, which accounts for almost 60% of a truck s transit time, can hugely reduce, thus quicken supply. Impact: Organizations will now be able to explore a different distribution model from the traditional carrying and forwarding (C&F) distributor-based models. Growing demand for Larger Hubs / Regional Distribution Centre as well as Smaller Spoke warehouses. VAPI NAGPUR BHUBANESHWAR MUMBAI PUNE HYDERABAD KOLHAPUR VIJAYAWADA CONSOLIDATION Impact: Post GST, the focus would shift on efficiency rather than tax saving through smaller warehouses. Companies to re-structure their warehousing portfolio to bring in larger and supply - chain efficient warehouses, typically built to their specific warehouse requirements. BENGALURU Established Hubs Upcoming Hubs CHENNAI MORE ORGANIZED PLAYERS Impact: Existing organized warehousing developers can expect significant increase in demand. More organized players are expected to enter the sector. COIMBATORE KOCHI EFFICIENT WAREHOUSES Impact: Efficient warehouse management is expected to boost the sector as the warehouses are expected to have economics of scale thus increasing Per Cubic Metre storage efficiency of warehouses. Source: Indian Manufacturing and Logistics: On a Roller Coaster Ride, JLL- Jan 2017

22 Warehouse Stock (million sq ft) 30.0 Warehouse Space (million sq ft) Outlook The current Grade A supply in India is expected to grow. As per JLL estimates, Grade A and B warehousing stock is at 112 mn.sq.ft. and is expected to grow. Organized warehousing developers will play a significant role in framing the warehousing landscape in short to medium term. Grade-A & Grade-B Warehouse Stock Ahmedabad Mumbai Bengaluru Pune New Delhi Chennai Kolkata Hyderabad Grade A Grade B Rental Warehouse , INR/sq ft/month) Note: City wise warehouse (WH) stock of 2016 consists of Grade A and Grade B. It does not include the stock owned by the Govt., ICD, FTWZ and captive warehousing stock of manufacturing companies that are within or beyond their premises. Y-O-Y Warehouse Stock Grade-A & Grade-B ( ) * 2018* Grade A Grade B Note:*Forecast numbers Source: Indian Manufacturing and Logistics: On a Roller Coaster Ride, JLL- Jan 2017 Probable Impacts on Product Supply Chain Focus was on how to save tax and get financial incentives Selection of location was dominated by state s tax benefits & financial advantage. Procurement Manufacturer Distributor Tax collected by manufacturer not adjusted against tax collected from the retailer for interstate sales. Final price to consumer may be higher when manufacturer is from another state. Retailer Consumer Focus can shift to quality of raw material. Focus can shift to other important factors like proximity to market or raw material. Input tax credit will be available (subject to conditions) which will in-turn reduce the tax burden. Focus on the quality of goods consumers get, as the taxes will be uniform. Manufacturing Highlights Industrial Revolution Chronology END OF 18TH CENTURY BEGINNING OF 20TH CENTURY BEGINNING OF 1970S PRESENT The Smart City Initiative is also expected to have an impact on IR4 in India 1st Industrial Revolution (IR 1): Mechanical Production Facilities were introduced, which used the power of Water and Steam. 2nd Industrial Revolution (IR 2): Mass production was introduced which used electrical energy. 3rd Industrial Revolution (IR 3): Electronics and IT were introduced in Manufacturing sector, with further automated production. 4th Industrial Revolution (IR 4): ) Cyber physical production systems and Artificial Intelligence are expected to be introduced in manufacturing. Make in India initiative will join hands with IR4 in India India s thrust towards the Digital India initiative is in line with IR 4 mission Manufacturing Industry Update: The Government of India has set the target of increasing the contribution of manufacturing output to 25 per cent of Gross Domestic Product (GDP) by 2025, from 16 per cent currently. Prime Minister of India, Mr. Narendra Modi, had launched the Make in India program to place India on the world map as a manufacturing hub and give global recognition to the Indian economy. India is expected to become the fifth largest manufacturing country in the world by the end of the year Investments: Foreign Direct Investment (FDI) inflows in India s manufacturing sector grew by 82 percent year-on-year to US$ billion during April-November (Source:

23 GST - The Inflection Point for Manufacturing Probable Impacts on Product Supply Chain Emerging Sector - REITs Overall reduction of cascading effect of taxes Positive Impact on cost of manufactured products for consumer as raw material cost and production cost reduce The first REIT listing is likely towards end 2017 and the biggest impact will be on commercial assets. Some of the largest developers will be seen keen to list their assets. Overall we expect greater push towards asset maintenance and greater liquidity for developers. Supply chain will be better managed, JIT management philosophy, less wastage Earlier the state based indirect tax system required manufacturers to set up local warehouses to save cost. The GST system will ensure lesser Warehouse setup requirement. These savings will help the manufacturers in capacity buildup and produce more economically. Reduction of transportation time and costs Removal of multiple checkpoints and permits at state border checkpoints will save road hours and reduce costs Advent of geographical business locations The decision of setting up business/ logistics/warehousing location will now be dealt by geographical positioning and not on tax based decisions. Many new locations will come up as attractive warehousing or logistic bases. Larger Warehouses will come up Consolidation of smaller warehouses into larger, superior quality ones will take place. While the overall impact of GST will be positive for the manufacturing sector, the exclusion of Petroleum from GST will be a dampener. Petroleum products such as high speed diesel, are common fuels used in various manufacturing processes, as also for transportation of inputs and final products. A REIT is a legal entity that owns, and in most cases, operates income-producing real estate and in some cases finances it also. REITs must distribute it s after-tax income to shareholders annually in the form of dividends. As per proposed SEBI regulations, not less than 90% of its annual net income after tax shall be distributed in the form of dividends. Recent clarity on Dividend Distribution Tax, and SEBI measures like : allowing 20% investment in under - construction projects (up from 10% earlier), allowing larger number of sponsors and restructuring laws on SPVs will help investments into the REITs markets.