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Sectoral Report

Real Estate Sector India

2/7/2011

Neha Jain


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REAL ESTATE SECTOR REPORT

1.

Sector OverviewIndia being one of the fastest growing economies in the world needs to pay a lot of attention

towards developing Infrastructure in order to maintain its fast pace of growth. Presently Real EstateSectors contribution is 5% in the Indias GDP with a total economic value of US$ 40-45 billion making it the top real estate investment market in Asia .

The phenomenon of Globalization has led to an increase in demand in the Real Estate Sector inIndia. Currently estimated to be a US $ 16 billion industry, it is expected to reach the size of US $ 180billion by 2020 with a CAGR of 30%. Real Estate Sector Received $2.8 Billion FDI this Fiscal Year

Until 2001, the Real Estate Sector was open only to the NRIs and corporate bodies overseas with alimited contribution. But after opening up of the sector to foreign investors with allowed FDI of 100% , It has become one of the major FDI attracting sectors in India with the total FDI Flow of morethan 2.8 billion 2000 and 2009 and is expected to increase by US$ 21 billion over the span of nextten years.

The main segments of the sector can be classified as Residential, Commercial, Retail and HospitalityAssets and SEZs .

SWOT ANALYSISStrengths

Weakness

Regardless of the nature and extent of the

economic slowdown, growth in constructionspending in the longer term is likely to beenormous, driven by a rising populationand a growing middle class.The economy grew strongly in the pastdecade, with a 10% fall in poverty. Indiasmiddle classes have expanded on the backof global outsourcing trends and localstrengths of high education and excellentIT skills and resources. The scale of realestate demand can be seen in thesubstantial number of totally newtownships planned, often associated withthe development of special economiczones.100% foreign direct investment (FDI) isnow allowed in construction. When globalconditions recover, this will allow significantinflows of capital to meet growing demandfrom the increasing middle class.Population growth rates remain well abovereplacement level. The number of peopleliving in urban areas is likely to grow

As a result of the global financial

weakness, cash flow management anddebt levels will affect real estatedevelopment. This constraint was notevident prior to the crisis, and should easein time.Poor working conditions, especially low payand abysmal safety pre-requisites, arethenorm for millions of constructionlabourers.Bureaucracy is excessive by Westernstandards, and general infrastructure isweak.

Lack of structured regulatory and policy

framework, or well defined operatingandfinancing regulations.


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significantly.No evidence that funding is a constraint forthe developers, or at least the larger ones,in normal economic times.

Cheap labour. More than half thepopulation estimated to be younger than

25. Opportunities ThreatsThe government has pledged to build 2mnunits of low-cost housing a yeartoovercome housing shortages. This will domuch to offset any employment downturn.

Indias very large cities are predicted togrow over the next 10-15 years, withMumbaimoving from fifth to second largestcity in the world, Delhi from sixth to thirdandKolkata remaining in eighth place, butseeing its population increase fromaround14mn to around 20mn.

Banking sector reform has long been apriority for Prime Minister ManmohanSingh.

Global financial malaise has led to anincrease in interest rates for projectfinancing from 9-11% to 14-16%.India may be unable to cope with itsburgeoning population, which has passedthe 1bn mark, posing a major threat to theeconomy as a whole.Hindu nationalism is a growing threat toIndia's constitutionally enshrinedsecularism. Communal tensions betweenHindus and minority Muslims, Christians,

Sikhs and Buddhists can lead to violence. Tensions in Kashmir are a source of

instability. India has experienced a seriesofserious terrorist attacks, with militantgroups bombing public places.

2.

General Trends in the sector

1.

Steady expansion and development in the IT sector of India: In India there has been a constantexpansion in the IT sector . Various MNCs and corporate houses have come up that have givenway to the growth in the real-estate sector especially in the commercial property sector . Thishas also provided better employment opportunities to the people of India and thus helping inthe overall growth of the Indian economy and subsequently in the growth of the real estate.

2.

Adoption of Foreign Direct Investment (FDI) policy: The growth in the real estate sector of Indialargely depends on its government policies. Currently, the government of India has adoptedForeign Direct Investment (FDI) policy , which has allowed the coming in of the foreign investorsin the Indian real est ate market. Some of the worlds famous builders are taking keen interest ininvesting in the Indian realestate market. Coming in of foreign builders promises betterprospects in the Indian real estate industry in terms of regulatory policy, efficient management,and the use of more advanced technology .

3.

Easy access to bank loans: Today, various national and multinational banks are present in Indiathat has made the home/property loans easily accessible. So, buying a property is not difficult
http://www.realestateindia.com/home-loans/http://www.realestateindia.com/home-loans/


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even for those belonging to middle-class. Thus, it has enabled the overall growth of the Indianreal estate.

4.

Growth in Indian economy: Indian economy is one of the fastest growing economies of theworld. It has a direct influence on the real-estate sector of India. Some of the major areas which

have been greatly affected by the growth in Indian economy are Delhi NCR, Mumbai,Hyderabad, Chennai, Bangalore, Pune and Kolkata . This growth is observed in all forms of property such as commercial, residential and industrial .

Current Indian PerspectiveFinancing & Capital:


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Source: CII white paper, 2010

Key IssuesFor Indias real estate developers, 2009 was a difficult year. Rents fell, projects were put on holdandcompanies feared, not necessarily with good reason, a major recession. At the beginning of the year, mostof our sources were optimistic about the next 12-24 months. This was in spite of

the clear oversupply ofcommercial real estate in all three sub-sectors and most of the citiesfrom which we gathered data. Somesources noted that changing or inconsistent governmentpolicies had posed challenges although theoverall economic environment was undoubtedlyfavorable.The staging of the Commonwealth Games in New Delhi in early October 2010 has led to a majorrealestate market upgrade. Residential property prices in thevicinity have risen steadily for atleast a year at levels of 10-15% pa. The Games Village is a premiumdevelopment in a primelocation. The surrounding area of East Delhi has benefitted notably fromimproved infrastructureand connectivity. Indias economy is booming again on the back of a successful policy stimulus, an increase in

commercialcredit and the general improvement in global conditions. While cyclical drivers willinevitably fade overthe fiscal year to March 31 2011, robust domestic demand will continue tounderpin the economy. Real GDP growth is forecasted to accelerate from 7.8% in 2009/10 to7.8% in 2010/11.

An expansion in lending by Indias commercial banks, following a year of restraint, whichshouldunderpin increased consumer spending and capital investment.


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A substantial improvement in rural consumption, as agricultural production recovers in the wakeof apoor monsoon last year.

Continuing large-scale infrastructure development, which should promote investment incommercial real estate

1.

Mumbai Asia's 4th costliest place for office space in Oct-Dec

Mumbai has become the fourth costliest city in Asia Pacific for renting a office in the last quarterof 2010 with cost higher than even places like Shanghai, Seoul and Sydney, according to JonesLang LaSalle. The top three costliest cities are Hong Kong , Tokyo and Singapore , where averageannual rents at the most expensive locations stood at USD 1,511, USD 752 and USD 747 per sqmt during the quarter.While the average annual rentals of Mumbai during the quarter has been estimated at USD 705per sq mt, the same has been found to be USD 503 per sq mt for Delhi.

2.

Housing prices may dip in Mumbai; rise in NCR this yr: Crisil

Mumbai and NCR would together account for more than half the 1.5 billion sq ft housing supplyplanned in India's 10 leading cities up to 2013. Prices in Mumbai expected to decline by 8-10 percent in 2011 because of rising interest rates and falling demand and in NCR, prices will move upmarginally because of relatively better affordability.

3.

Position of the Industry life cycle

Since the last four months, software stocks have emerged as the safest bet, safer than eventraditional sectors like FMCG and pharma, while real estate stocks were the worst performers.

The data on the performance of sectoral and other indices shows that BSEs real estate indexhas lost 40.4%.

Even when compared on a monthly basis, the realty index is down nearly 22%, while the IT indexhas lost 6.7%%, and the sensex 10.6%.

A number of headwinds that the real estate sector is facing are the reasons for the currentinvestor apathy towards realty stocks, the low level of institutional holding in this sectorcompared to sectors like IT and banking, also affected the sectors performance.

A recent sector report by Edelweiss Securities said that although the demand for housing inIndia continues to be robust, rising interest rates, increase is residential prices in some citiescrossing the peak levels seen is 2008, and rising construction costs will continue to bedampeners for the sector.

4.

Top 5 companies in the sector


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DOMESTIC

UnitechEstablished in 1972 as United Technical Consultants, the company carries onconstruction of industrial projects on a turnkey basis and execution of housing projects

and export orders. It is known for the quality of its products and is the first real estatedeveloper to have been certified ISO 9001:2000 certificate in North India. The brandwas conferred with the title of Superbrand by Superbrand India in 2010. Unitech has the most diversified product mix comprising Residential,Commercial/Information Technology (IT) Parks, Retail, Hotel, Amusement Parks andSpecial Economic Zones (SEZ).The best feature of Unitech is that it has long partnered with Internationally acclaimedarchitects and design consultants including SOM(USA), BDP(UK), Maunsell AECOM(HK),MEA Systra(France), Callison Inc.(USA), FORREC(Canada), SWA and HOK(USA) for various

projects. Unitech scrip is one of the most liquid stocks in the Indian stock markets and was thefirst real estate company to be part of the NIFTY 50 Index .The Company is also the recipient of the CW Architect and Builders Award, 2008 forbeing one of India's Top Ten Builders . Unitech's clientele for commercial projects includes global leaders such as Fidelity,McKinsey, Bank of America, Ford Motors, Nike, EDS, Hewitt, Amdocs, Ernst & Young,Reebok, Keane, Seagrams, Perfetti, Exxon Mobile and AT Kearney.

DLF

It is India's largest real estate company in terms of revenues, earnings, marketcapitalization and developable area . It is based in New Delhi but has a pan Indiapresence across 30 cities all across India with major presence in Gurgaon and Kolkata.Founded in 1946, by Raghuvendra Singh, it has been a pioneer in development of residential, commercial and retail properties all across the country.The Group has been accredited of developing some of the first residential colonies inDelhi such as Krishna Nagar in East Delhi and many other urban colonies like SouthExtension, Greater Kailash, Kailash Colony and Hauz Khas.The passage of Delhi Development Act in 1957 gave the state authority the control of real estate developments in Delhi which led to acquisition of land in areas nearby Delhiand this led to the development of Asias largest private ownership DLF City atGurgaon, Haryana which has spread over 3000 acres. DLF City is spread over 3,000 acresin Gurgaon and is an integrated township, which includes residential, commercial andretail properties in a modern city infrastructure with schools, hospitals, hotels and


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shopping malls. It also boasts of the prestigious DLF Golf and Country Club with nightgolfing facilities.

o Primary business - Development of residential, commercial and retailproperties. It also involves in urban development and housing, and offers superluxury, luxury, and mid-income homes.

o It develops commercial projects and IT parks, as well as leases office space. DLFLimited develops retail real estate in various formats, including luxury malls,shopping malls, and neighborhood malls, as well as commercial complexes. Italso involves in the power generation, provision of maintenance services,hospitality and recreational activities, life insurance, and operation of retailchain outlets.

o It has developed more than 220 million sq.ft. of BUA and specializes in planningHotels, Infrastructure and SEZs 574 million sq. ft. of BUA under planned Projects

Parsvnath Developers The Company is engaged in the business of promotion, construction and developmentof integrated townships, residential and commercial complex, multi-storied buildings,flats, houses, apartments, shopping malls, information technology (IT) parks, hotels andspecial economic zones (SEZs).The Company is developing 16 integrated townships with 69.85 million square feetsaleable area spread across 15 cities. The subsidiaries of the Company include Parsvnath SEZ Limited, Parsvnath HotelsLimited, Parsvnath Retail Limited and Parsvnath Landmark-Developers Private Limited. At present, Parsvnath Developer's ongoing 100 projects include integrated townships,group housing, shopping malls, it parks, commercial complexes, hotels and SEZ projectsacross all industry verticals in India. The projects are estimated to cover over 200 millionsquare feet across all real estate verticals of India.It has become the first real estate company to achieve a NAREDCO-ICRA DR 2- rating.Parsvnath Developers Limited is also the first real estate developer to be certified toIntegrated Management Systems (IMS) comprising of ISO 9001:2000, ISO 14001:2004and OHSAS 18001:1999 certification by the Italy-based, Global CertificationOrganization, RINA group. Currently, it has marked its presence in 50 cities and 17 states in India. It boasts of beingone of the most widespread real estate developers in India. Besides strengthening itsposition in core operations of real estate, the company is striving to expand its productofferings, by catering to emerging markets and segments. As per the expansion drive,Parsvnath Group is planning to foray into info tech, departmental stores, amusementparks, exports and imports.
http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=C356KUC00http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=C356KUC00


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Operational Developments:

o Sold an area of 0.70 mn. sq. ft. in Q1FY11.o During the quarter, company offered possession comprising an area of 1.39

mn. sq. ft.o Licenses, Approvals & Certificationso Building plans approved for constructing a commercial complex at Seelampur

DMRC Metro Station, Delhi.o Building plans approved for constructing a Group Housing at Subhash Nagar,

Delhi.Delhi Metro Rail Corporation Ltd. (DMRC) has awarded Safety Certificate to PDL forcompleting one million man hours worked without reportable incident. This is withregard to the construction of Dhaula Kuan Metro Station at the Airport Metro Expressline.

Ansal Properties K Raheja Corporation Sobha Developers

INTERNATIONAL

Ascendas, Singapore Emaar, Dubai

5.

The Top Three Players

1.

DLF Strengths - Established developer, particularly mid- to high-end; substantial landbank. Weaknesses - Net debt relatively high, although an aggressive de-leveragingprogramme is well

under way. Opportunities- DLF appears poised to take advantage o f the upturn in Indias economy; Retail

shopping centre development appears to be a big opportunity. Threats - Any stalling of Indias growth curve would affect DLFs key customer base the middle

class.

Company Overview

DLF claims to be the largest real estate company in India and operates in allsegments of the realestate sector (commercial, residential, retail, hotels,infrastructure and leisure). On July 5 2007 itlisted on the national and Mumbai stockexchanges.


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The companys homes business unit has a wide range of products, includingcondominiums,duplexes, row houses and apartments of varying sizes, with a focuson the higher end of the market.DLF has 214mn sq ft of developed area under homesand residential plots and more than 477mn sqft of land resource targeted towardsresidential business. DLF's office segment has almost 40mn sq ft of ongoing projects and current landresource owned byDLF for development of offices across the country of 164mn sq ft.DLF has begun to focus heavily onretail and is creating new shopping andentertainment spaces across India. It has 12mn sq ft of retailprojects underconstruction and a landbank of another 92mn ft2 for development in urbancentresacross India. DLF is reorganising, with a focus on two business segments: development ofcommercial complexesfor sale, and so-called annuity projects of offices and retailshopping centres. It also plans to launchstrategic city centric housing projects anddevelop the luxu ry segment. Financial Highlights

In January 2010 DLF reported that it will only be able to raise half of the targetedINR55bn that fiscalyear, by selling assets not central to its business of developingproperty. The companys net debt forthe quarter ended December 31 2009 grew byINR6.95bn to INR128.3bn, compared withINR121.35bn in the previous quarter. In July, the company announced Q110 results (ending June 2008) of INR17.46bn inrevenue andINR3.96bn in net profit. EBIDTA was INR8.4bn, up 119% y-o-y.DLF has been focusing on reducingdebt and announced cuts of INR5bn in Q110through the sale of non-core assets. Key Personnel

Executive chairman: K P SinghManaging director: T C Goyal

2. PARSVNATH DEVELOPERS Strengths - Wide geographic and sectoral exposure;Good government contacts and pipeline of

infrastructure opportunities. Weaknesses -Relatively high leverage, although this is being addressed through a seriesof

investments and capital injections. Opportunities -Well placed to benefit from national and regional stimulus packages. Threats -Any stalling of Indias growth would affect Parsvnath, although diversity in sectors and

geography would leave it in a better position than some rivals.

Company Overview

Parsvnath operates in 50 cities and 17 states and is a major Indian real estatecompany. It operatesacross all real estate sectors, including residential, commercial,retail and leisure. It listed on theBombay Stock Exchange on November 30 2006, andhas been operating for 20 years. Parsvnath has completed 37 projects so far, comprising 11.23mn sq ft in total.It claims to be one of the most diversified and widespread real estate developers inIndia, with 114 ongoing projects


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spread over a developable area of over 211.32mn sqft across all real estat e verticals. On March 52009 it launched an INR100 croreaffordable housing project in Lucknow comprising 510 units.

Financial Highlights

In 2009, Parsvnath entered into an investment agreement with Red Fort Capital thatsaw an injectionof INR90mn in exchange for an 18% equity interest in Parsvnath LaTropicana. The company receivedapproval from the Municipal Corporation of Delhi forParsvnath La Tropicana, a premium luxuryproject in the heart of Delhi worth INR13bn.In July 2009, the company said it was in talks withinvestors to raise US$100-150mn infresh equity through qualified institutional placement (QIP). Thecompany sees thingsimproving from now in the property market. It cites better sentiment andnewgovernment measures as reasons for the real estate market to bounce back soon.In January2010, media reports indicated that Parsvnath was in the process of raisingINR1bn in refunds fromvarious state governments due to cancelled or stalled projects.

In 2009 Parsvnath was able to get refunds of over INR2bn from a group housingproject at Sector 16in Noida.While data for FY2008 data showed a healthy growth in revenue and net profit, likeother

real estate companies, Parsvnath was affected by the worsening economicconditions, leading to aslump in Q409 (Q109 of the calendar year). However, similarlyto other Indian property companies,Parsvnath showed a distinct improvement in itsresults for the three months to June 2009. Revenueswere INR1.19bn, up from justINR240.1mn in the previous quarter. EBITDA was INR464.8mn, up fromINR343.3mn.

Key Points

Total revenue INR17,922.44mn (fiscal year ending March 31 2008)Net profit INR4,087.37mn (fiscal year ending March 31 2008)

Key Personnel

Chairman: Shri Pradeep Kumar JainManaging director: Shri Sanjeev Kumar Jain

3. SOBHA DEVELOPERS Strengths - Substantial regional development operations based in Bangalore. Weaknesses - Relatively high debt levels, although it has taken steps to address this;High

exposure to regional downturns that have been severe in parts. Opportunities -Ideally placed to benefit from renewed growth in India. It can be expectedto

benefit from various stimulus spending measures.

Threats -Bangalore in particular subject to foreign economic trends, which could puta dampeneron economic growth there.

Company Overview

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, butalso operates in Kerala,Andhra Pradesh, Orissa, Tamil Nadu, Punjab, Harayana and Maharashtra.


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Itundertakes both commercial and residential projects.The company reports that it believes thatthere have been clear signs of a revival indemand in the real estate industry. With the economygrowing at 6-7% a year, andexpected to achieve a higher growth rate in the next couple of years,real estateindustries are poised to play a significant role. It will be a domestic-drivenindustry,growing at a much faster pace.

Projects

By June 30 2009 Sobha Developers has completed 50 residential/commercial in-houseprojects and146 contractual projects covering 31.9mn sq ft of built-up space. It had 31residential/commercialongoing projects totalling 9.2mn sq ft.

Financial Highlights

Developers has reorganised debt, bringing on board a private equity partnerand successfullycompleted a qualified institutional placement (QIP) raising INR5bn.

In January 2010, the company announced discussions were being held to raiseINR3bn at projectlevels. This would be the second major fund raising SobhaDevelopers has undertaken, after it raisedINR2.25bn in H209 from a fund sponsoredby Infosys co-founder NS Raghavan. It seems that thecompany, which has a landbank of 3,000 acres, has been taking these steps to reduce its leverage ondebt and ithas managed to bring down the ratio to 0.8 from a peak of 1.6 on a debt of closetoINR19bn. The companys financial year ends on March 31. Sobha was badly affected by the aftershocks of the global financial crisis and reporteda dip in profitin Q110 to INR127mn, compared with INR505mn in Q109. Q1 net profitrose by 76.4% quarter-on-quarter to INR127mn, while total income was up 15.6%.

Key Points

Total revenue: INR14,226mn (fiscal year ending March 31 2008);Net profit: INR2,283mn (fiscal year ending March 31 2008).

Key Personnel

Chairman: PNC MenonManaging director: JC Sharma

6. New Developments in sectorAccording to data from the Department of Industrial Policy and Promotion, foreign directinvestment(FDI) inflows were US$100.33bn between 2000 and July 2009. This reflects Indiasstatus as a safeinvestment destination during the global financial crisis. Over the past decadeIndia has become anincreasingly attractive destination for FDI. Its large size, positive coststructure and favourablemacroeconomic climate are proving to be major draws for foreigninvestors, who are also attracted by ahighly educated workforce and strong management talent.


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o Meanwhile, the Reserve Bank of India (RBI) has revised the norms for urban cooperativebanks for giving loans to the housing and real estate (RE) segment. Now, urban bankscan use up to 15 per cent of deposits to provide housing, real estate and CRE loans.Earlier, the RBI norm permitted them to use up to 15 per cent of deposits for givingadvances to housing loans and other block capital loans.

10. Key drivers of the sector

The sector is on the path of rapid evolution. From being highly unorganized and fragmented duringlast many decades it is soon becoming more and more semi-organized with the entry of privateplayers and foreign players for investment.

The key driving factors for the sector have been:

High rate of growth in the services sector like Telecom, Financial Services and IT-ITes High rate of urbanization and movement of the population from rural areas to sub-urban and

metropolitan cities. Increase in demand of

o Office spaces - due to increase in presence of global companies in India,o Residential space and affordable Houses - due to increase in population and increase

in per capita incomeo Retail Space due to increase in investment in infrastructure for commercial usage like

malls etc. The other key drivers of the sector can be categorized as

o SUPPLY PUSH FACTORS Policy reforms by government like allowing 100 % FDI in the sector Fiscal incentives to the developers Infrastructure support and development initiatives by the government

o DEMAND PULL FACTORS Robust and Sustained Macro economic growth Growth in industrial and business activities in industrial sectors in India Increase in consumerism and urbanization Availability of easy financing options at affordable interest rates

11. Recent News/Headlines The present and the future

NATIONAL

Adarsh Society Scam


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The CBI has registered a first information report (FIR) in the Adarsh Housing Society case naming 13people, including former Maharashtra chief minister Ashok Chavan and some retired senior Armyofficials, according to a report. The Adarsh society building was meant to be a six-storeyed structure to house Kargil war heroes but

was later extended to 31 floors allegedly without mandatory permission. The report stated that RCThakur, Wanchoo and Gidwani were allegedly the prime movers in building the society. There are reports that the FIR also names retired Lt General PK Rampal, Major Generals AR Kumarand TK Kaul, the then principal secretary (urban development) Ramanand Tiwari, who wassuspended by Maharashtra government as information commissioner, Subash Lala, the thenprincipal secretary to the chief minister and Brig (retd) RC Sharma. The FIR has been filed under various sections of IPC including cheating, forgery and showing forgeddocument,adds report

2G Sector Scam and DB Realty

Investigating agencies which are probing the alleged irregularity in allocation of 2G licences areexamining a transaction in which over Rs 200 crore was transferred from Mumbai-based DB groupto Kalaignar TV, a broadcaster majority-owned by family members of DMK party chief MKarunanidhi. Officers from investigating agencies are interested in the deal because the telecomarm of DB Realty figures among the companies that bagged 2G licences in 2008. A Raja, thecontroversial former telecom minister and a leading light of the DMK who was arrested by theCentral Bureau of Investigation (CBI) on Wednesday, was in charge when the licences were handed

out, allegedly at below-market prices. The DB group's telecom arm had sold 45% to UAE-basedEtisalat for $900 million in 2009. The company, earlier known as Swan Telecom, is now known asEtisalat-DB.

INTERNATIONAL

Chicago-based Vestian Global Workplace Services, an integrated real estate services provider,on Tuesday said it would invest `1,500 crore in India and China over the next 18 months. Thecompany, which raised the fund from global investors, said about 70 per cent of the proposedinvestment was earmarked for the Indian market.

Within India, the company will focus on three key southern markets including Bangalore,Chennai and Hyderabad. Globally, it is looking at development of commercial space in India,China and the MiddleEast. The need for increasing need for office workspace in Hyderabadarises from the fact that within the last three quarters, about five million sq.ft office space hasbeen absorbed by corporate creating about 50,000 jobs in Hyderabad.


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Reference

1.

Ibef.org2.

Kpmg reports

3.

Pwc reports4.

Economic times

5.

Business standard

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