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REVIVALI n d i an R e a l t y S e c t or o n t h e pa t h t o r ec o v e ry
SURVIVAL TO
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EXECUTIVE SUMMARY
DEMAND FORECAST
ATTRACTIVE LOCATIONS
INVESTMENT SCENARIO
SIGNIFICANT REAL ESTATE
REGULATIONS
THE ROAD AHEAD
FOR REALTY
1
37
2227
28
Table of Contents
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Prevalent market sentiments indicate that thereal estate sector around the world (with a few
exceptions such as Europe) has begun to bottom
out. Attracted by correcting values, investors
and end-users have begun to cash in on good
bargain buys, bringing momentum to the
activities in this sector. Asian economies, with
strong fundamentals to cope with the ongoing
economic crisis, have performed better than
their North American and European
counterparts. Over the second quarter of 2009,
1the Asia Consensus Economics Forecasts on
principal macroeconomic indicators, improved
for large Asian countries (although a few
smaller nations continued to remain
pressurised).
Executive SummaryThere is no doubt that the fiscal stimuluspackages, which were offered as remedial
measures by various Asian governments, have
started to show results. The forecasted
improvement is based on an upward revisions of
the first quarter GDP estimates. Despite
divergent views amongst large international
institutions, Asia is believed to be better placed
economically because of its low levels of debt
exposure at the government, corporate and
consumer levels, which has aided an early
recovery process, now underway.
It has been observed that in certain mature
Asian markets, positive sentiments have
translated into higher occupier confidence. A
few major locations in India too have seen a
significant turnaround in the number of
viewings/enquiries for commercial spaces in 2Q
2009, indicating rising interest and growth in
activities. Despite weaker demand in 2009, the
rise of activities in the sector can be taken as a
positive indication for the country's realty
sector, which is expected to revive by mid-2010.
Coinciding with the return of buyer interest in
select locations, land deals too have begun to
stage a slow recovery. Land, being the key
requisite for all real estate activities, is also the
component which usually lags in the recovery
cycle and hence a revival in this segment can be
considered as an indication of gradual revival of
the market. The window of opportunity in
investments now lies in entering or reinvesting
before the market bottom shifts out.
The real estate sector in India is now on a
gradual improvement curve with new projects
being launched and the liquidity position of
developers improving on the back of Qualified
Institutional Placement (QIP) issues and
proposed public offers. Despite a lack of any
serious announcements made during the interim
and final Union Budget for India's realty sector,
there has been an increased emphasis on the
1. Based on recent Asia 2009 report of Consensus Economics
1
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FDI Inflow in Real Estate & Construction (in USD million)
2006 - 07 2007 - 08 2008 - 09 2009-10 (F) Cumulative inflow(Apr'00 to Jun'09)
Housing & Real Estate 467 2,179 2,801 1,181 6,693
Construction985 1,743 2,028 603 5,874(Including roads & highways)
At this juncture of the country's economy,
Cushman & Wakefield Research revisits its
real estate demand estimates. The forecasts
for pan-India commercial office space demand
for the period 2009-2013 stands at
approximately 196 million sq.ft., while retail
space demand for the same period across India
is estimated to be about 43 million sq.ft.
Demand for hospitality and residential
segments are likely to be over 690,000 room
nights and 7.5 million units, respectively.
Over the next 3-5 year period, a fair amount
of investments would be required for slaking
this anticipated demand. In this report
Source : Department of Industrial Policy & Promotion
infrastructure sector with higher allocation of
funds. The Reserve Bank of India (RBI) has also
directed the banking sector to reconsider
lending to the realty sector.
India's economic performance vis--vis other
economies over the past year has encouraged
many global investment firms to reconsider
India as a potential investment destination.
According to the Indian Brand Equity
Foundation (IBEF), the quantum of investments
by Foreign Institutional Investors (FIIs) in
domestic equities crossed the USD 60 billion,
for the first time since the recent economic
slowdown from mid 2008. The netinvestment position of FIIs increased from
USD 53.3 billion on March 9, 2009 to over
USD 60.3 billion till June 10, 2009. Foreign
Direct Investment (FDI) inflows in the first
six months of 2009 began on a good note too,
with a cumulative influx of about USD 1,382
million for the first 5 months of the year. Our
analysis indicates that Maharashtra continues
to be the most favoured location forinvestment amongst the institutional
investors followed by the National Capital
Region (NCR) and Karnataka, which have
also attracted substantial investments.
The role of FIIs and FDI in the country's real
estate sector has been exponential in its
growth and development. For the period
under consideration (August 2008 - August
2009), an asset class-wise analysis of total
foreign investments indicates that the
residential sector has been the highest
investment grosser followed by the township
sector. The table below indicates the quantum
of FDI inflows into the realty and
construction sectors.
Demand Projection (2009-2013)
20% 40% 60% 80% 100%
Hospitality
Residential
Retail
Office
0%
2009 2010 2011
Source : Cushman & Wakefield Research
Over 690,000 Room Nights
Over 7.5 million units
Over 43 million sq.ft.
Over 196 million sq.ft.
2012 2013
Cushman & Wakefield Research has further
attempted to identify and examine select
locations with high potential that may be
viable investment opportunities.
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The Indian real estate sector has undergone a
rapid transformation during 2008-09 due to
the global economic crisis. The high growth
trajectory of the previous years saw a setback
during this period. Inherently strong
economic fundamentals, low exposure to debt
and state intervention, however, have helped
the sector to gradually return to the path of
recovery.
Cushman & Wakefield Research revisits the
demand estimates post the economic crisis
which resulted in weakening business
sentiments and demand contraction. The pan
India cumulative demand during 2009-2013is estimated to be 196 million sq. ft. for office
and 43 million sq.ft. for retail. While
demand for the hospitality segment is likely
to be over 690,000 rooms nights, that for the
residential segment is expected to be 7.5
million units for the period under
consideration.
The estimates for various asset classes were
arrived at by considering variables which
form the primary demand drivers or major
Demand Forecastinfluential factors of that particular asset
class:
Office: The variables considered for demand
forecast are the Gross Domestic Product
(GDP), historical demand trend in the real
estate sector and anticipated future
commitments.
Retail: Factors influencing the demand for
retail segment are the occupancy levels in
existing markets which were analysed in sync
with the growth of the Indian retail sector
and the growth of consumerism.
Residential: The growth in income, increase
in the number of urban households, and the
growth in loan disbursement were some of the
considerations for residential demand forecast.
Hospitality: The demand estimate for the
hospitality segment, referred to as
Accommodated Demand, is computed
based on the estimated supply and anticipated
occupancy levels during the years under
consideration.
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Retail MarketCumulative retail demand across India is
estimated to be 43 million sq.ft. by 2013 ofwhich, demand in the top seven cities is
estimated to be nearly 34.6 million sq.ft. The
demand is expected to be concentrated in the
tier 1 cities constituting nearly 46% of the
total estimated pan India demand during the
period under consideration. Pune is expectedto record the highest compounded annual
growth of 51% due to the current limited
stock of operational malls and favourable
demographic profile which cites potential for
the growth of organised retail segment within
the city.
Bangalore, Mumbai and NCR are all expected
to see the highest demand, together
comprising approximately 20 million sq.ft.
The anticipated increase in the share oforganised retail is expected to grow from 5%
to 15.5% by 2016, according to the
Investment Commission of India, highlighting
the potential for retailers to expand pan India.
Retail Demand (Pan India, 2009-2013)
0
2009E
MillionSq.ft.
2
2010E 2011E 2012E 2013E
4
6
8
10
12
14
Source : Cushman & Wakefield Research
Retail Demand (Million Sq.ft., 2009-2013)
0
1
2
3
4
5
6
7
Hyderabad Kolkata
NCR
Chennai
Bangalore
Mumbai
Pune
5
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Hospitality MarketThe increasing contribution of in bound and
domestic travel and tourism to the GrossDomestic Product (GDP) of India has
provided the necessary impetus for the
growth of the hospitality industry. According
to the Travel & Tourism Competitiveness
Report 2009 by World Economic Forum, the
contribution of travel and tourism to GDP is
expected to be approximately 6% in 2009
and the real GDP growth for travel and
tourism economy is expected to be at 0.2% in
Accomodated Demand(Room Nights, 2009-2013)
Hyderabad Kolkata
NCR
Chennai
Bangalore
Mumbai
Pune
80,000
0
120,000
100,000
60,000
40,000
20,000
Source : Cushman & Wakefield Research
Hospitality Demand (Pan India, 2009-2013)
02009E
Room
Nights
50,000
2010E 2011E 2012E 2013E
100,000
150,000
200,000
2009 with a potential of increase to an
average 7.7% per annum over the next 10years. The pan India accommodated demand
for the hospitality sector is estimated to be
over 690,000 room nights by 2013. Tier 1
cities are likely to drive the demand in the
hospitality segment led by NCR which is
estimated to constitute 15% of the total
demand by 2013, followed closely by
Mumbai at 14%. The upcoming
Commonwealth Games in 2010 is one of the
main demand drivers of room nights in theNCR. Bangalore, however, is expected to
register the highest compounded annual
growth of about 26% in demand, followed by
NCR at 24% and Pune at 23%.
Tier 2 and 3 cities are also likely to generate
demand for 242,000 room nights by 2013
owing to various initiatives taken by the
Indian government to promote commercial
and tourism activity in these locations.
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With signs of economic stabilisation andmoderate global economic growth forecasted
for 2009-10, the property markets in Asia
Pacific, have begun to exhibit signs of revival
in the second quarter of 2009 as hope for a
wider economic recovery continues to grow.
With the country's economic outlook
beginning to improve, foreign institutions are
finding a way to buck the downward trend by
investing in India.
According to Indian Brand Equity
Foundation, in 2009 alone, India received
approximately USD 5.5 billion of FIIs out of
a total of USD 23 billion that flowed into
emerging markets. India also received close to
25% of the portfolio funds coming into
markets in Asia, Africa and Latin America.
This is significant in the light of the fact that
till 2007, India had received less than 15% of
the funds flowing into these emerging
markets.
Attractive LocationsEven though the overall demand for realestate space saw a decline in 2009 over the
previous years, the sector is expecting to see a
demand growth in the next five years backed
by inherently strong economic fundamentals.
In this section, Cushman & Wakefield
Research highlights a few high potential
micro-markets, among many others spread
across the country, investing into
development projects across various asset
classes. These locations have been evaluated
on existing base, expected demand, current
and future infrastructure, end user
attractiveness, potential in growth of rental
and capital values, investor interest,
performance of existing projects, expected
investment returns and availability of viable
investment options.
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The Outer Ring Road (ORR) stretch from
Hebbal to Sarjapur is an established
commercial destination with key IT
clientele (IBM, Intel, Accenture, CISCO
etc). In the last 3-4 years, this stretch has
witnessed significant growth in commercial
and residential developments. Besides good
physical infrastructure, this micro market
has other added advantages like consistentgrowth in office demand, better
connectivity to CBD/off - CBD and
suburban locations and good social
infrastructure. One of the key infrastructure
initiatives underway in this micro market
is the underpass at Hennur Banaswadi Ring
Road by the Jawaharlal Nehru National
Urban Renewal Mission (JNNURM).
The current quantum of leased stock in this
micro market is approximately 15 million
sq.ft. There has been an increasing share of
absorption in this micro market since 2006
with an average annual growth rate of 12%.
As previously indicated, demand for office
space in Bangalore in the next five years
will be approximately 34 million sq.ft. in
spite of weak demand in 2009-10 the city
is likely to see healthy activity thereafter. In
the year 2008, ORR micro market
witnessed approximately 48% share of thecitys total absorption and would continue
to attract interest from corporate. Most of
the prominent developers have their land
banks in this stretch and approximately 8 -
10 million sq.ft of commercial office space
has been planned over the next 3 5 years.
BangaloreOuter Ring Road Hebbal Sarjapur
Current warm shell rentals in this micro
market are in the range of INR 40-45 per
sq.ft per month, which is higher than other
peripheral micro markets like Whitefield
and Electronics City which command
rentals in the range of INR 20 - 25 per
sq.ft per month. Despite having higher
rental values, parameters such as low
vacancy rates (10%), proximity to several
residential catchments and improved
connectivity have worked in favour of this
micro market.
Outer Ring Road Hebbal toSarjapur, Bangalore
?Demand of 34 million sq.ft.expected in Bangalore in 5 years
?Established commercialdestination with key IT clienteles
?Underpass at Hennur BanaswadiRing Road
?Expected investment returnsfrom development projects 22-24%
The land along the Marathalli-Hebbal
stretch has undergone a price correction of
approximately 10-15% over the previous
year and is currently valued in the range of
INR 120-180 million per acre, whichenhances the affordability of this location.
Keeping all of the above parameters into
consideration, investments in development
projects within this micro-market are likely
to realize an Equity IRR (post tax) of 22-
24% in the medium term.
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Gurgaon has evolved as the alternate
business destination with influx of
corporate across diverse sectors. Majority of
the real estate activity in NCR has been
concentrated in this location leading to an
increase in the total demand of office space
in this location from 59% in 2007 to 72%
in 2008. According to the estimates,
demand for commercial office space in
Gurgaon is likely to be approximately 12-
15 million sq.ft. by 2013.
Golf Course Road has established itself as
an attractive office location in the past few
years. This stretch constitutes of a diverse
occupier mix spanning across IT/ITeS, BFSI
and pharmaceutical companies. The rental
values have corrected to the prevailing rates
of INR 70-80 per sq.ft. per month from
their peak values of INR 120-130 per sq.ft.per month in early 2008. It is anticipated
that demand for office space in this location
will double in the next few years with the
rental values appreciating to their peak
values, highlighting the potential of
healthy returns. To cater to the growing
demand of the location, approximately 3.5
million sq.ft. of commercial office space
supply is planned over the next few years.
National Capital Region (NCR)Golf Course Road, Gurgaon
Commercial developments in this location
are likely to realize an equity IRR (post tax)
of 23-25% in the medium term.
The infrastructural developments have
already helped this location to gain
prominence along with its proximity to the
airport and proposed connectivity to Delhi
through the metro network. The extension
of the road also offers lucrative
opportunities for Greenfield projects where
land has been amassed by several developers
and can be potentially exploited for future
commercial real estate developments.
Golf Course Road, Gurgaon
?Demand likely to double in nextfew years
?Diverse occupier mix?Upcoming Metro connectivity
and proximity to airport
?Expected investment returnsfrom development projects 23-25%
For investors looking at commercial real
estate options in North India, may take a
closer look at this micro-market.
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Navi Mumbai has emerged as a preferred
destination for the IT/ITeS companies due
to existing talent pool in the vicinity and
robust connectivity through rail and road
network. The availability of large land
parcels in this location, has been more
suitable for such companies. In order to
further support the growing office and
residential developments in the region,
several infrastructure projects such as metro
rail, Navi Mumbai airport and inter-state
bus terminal are being planned by City and
Industrial Development Corporation of
Maharashtra (CIDCO).
As the IT/ITeS sector regains its previous
growth rate post the recession, the demand
for office space in Navi Mumbai is also
expected to increasing proportionately. The
micro market possesses a potential ofadding approximately 8 -9 million sq. ft. of
fresh supply in short to mid term.
However, the supply will be intrinsically
linked to the demand pattern of the IT/ITeS
sector and is expected to enter the market
gradually in an effort to balance the supply
demand dynamics.
MumbaiNavi Mumbai (Vashi and Thane Belapur Road)
From December 2006 to December 2008,
rental values for IT space in Navi Mumbai
have appreciated at a Compounded Annual
Growth Rate (CAGR) of 15%. This growth
in rental values has been at par with
established micro markets like Andheri,
Lower Parel and Worli. Additionally, the
slowdown in real estate sector over the last
12 months has resulted in only a marginal
softening of rental values in the range of
11-13% compared to other markets which
witnessed corrections of about 20% to
40%.
Navi Mumbai
?Extensive land parcels withquality developments
?Potential IT/ITeS hub
?
Connectivity through rail androad networks
?Expected investment returnsfrom development projects 21-22%
Based on the above, investors in Navi
Mumbai can expect an Equity IRR (post
tax) of 21-22% for commercial
developments in short to medium.
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Retail real estate had, till recent years,
attracted investors attention due to theexponential growth in the organised retail
sector. However, with the economic
slowdown, the retail sector witnessed
constrained leasing activities and high
vacancy rates, thus adding to the segments
current low investment worthy status.
While the current market upheaval has
temporarily decelerated investment activities
in the sector, it is expected that the countrys
organised retail market would be back on its
growth trajectory in the next 3-4 quarters
(mid-2010), following which demand for
quality retail space would also begin to
improve, as retailers would begin to
restructure their portfolio with reviving
consumer sentiments.
With market demand recovering, there would
be a substantial requirement for quality retail
real estate over the next 3 to 5 years. As perCushman & Wakefield Research's estimates,
the future demand for fresh mall space in the
top seven cities is estimated to be about 35
million sq.ft in the next five years. Our
research estimates also indicate that
Retail Marketapproximately 60 million sq.ft of fresh mall
space is likely to come up across 40 cities inthe next three years.
Till recently the market saw the creation of
low quality spaces commanding unrealistic/
inflated prices, thus in situations of over-
supply and hyper-demand, many brands and
retailers were chasing a few good properties.
For retail, we have refrained from focusing on
any particular micro-markets for investments
as most locations still continue to hold the
potential for offering good quality mall
spaces; and that a quality product would
continue to remain profitable and
investment-worthy even in an over supplied
micro-market. However, most locations across
the country, are yet to fully exploit the
potential of the existing catchment through a
quality product.
Creating a successful mall is all about gettingthe right mix of elements from the very
beginning. More centralised mall operations
and efficient management will be favoured in
the long-term for sustainability. The emphasis
will be on long-term perspective and
unrealistic valuations will have no takers.
Matching operational costs with revenue
generation is also likely to take dominance.
Continued focus on customer and retailer
needs together with innovative approach to
design and commercial viability will pave the
way forward. But above all, extensive research
and professional consultancy regarding each
aspect of mall operations is likely to gain
prominence to ensure project sustainability.
Retail : Mall Rental Growth Index
2006
50
0
2007 2008 2009
100
150
200
250
Hyderabad (Banjara Hills)
NCR (Gurgaon)
Pune (MG Road)
Chennai (Central)Kolkata (Elgin Road)
Mumbai (Lower Parel)
Bangalore (Koramangala)
Source : Cushman & Wakefield Research
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Residential : Capital Values Growth Index
100
0
Bangalore (Brunton Road, Lavalle Road)
NCR (Satya NiketanAnand Niketan)
Mumbai (South)Pune (Koregaon Park)
Chennai (Boat Club)
Kolkata (Ballygunge)
200
300
400
500
600
700
Hyderabad (Banjara Hills)
Source : Cushman & Wakefield Research
2001 2002 2003 2004 2005 2006 2007 2008 2009
800
Over the past couple of years the residential
segment in India has witnessed varied sizes
and product mix, targeted towards a wide
range of buyers. The bouquet of offerings
have included apartments, villas, row houses,
builder floors, plotted developments and even
townships by major developers across the
country. The period of heightened real estate
activities also witnessed the entry of manyfirst time or relatively new developers who
concentrated on creating apartments or
Residential Marketindependent floors mostly in the suburban
and peripheral locations across the country.
However, due to the economic slowdown and
the ensuing credit crunch, many of the major
developers were forced to revisit their
portfolio. High-end luxury apartments and
villas, which had been the key focus areas in
recent times, were replaced by mid-scale
developments targeting the middle income
group. Since the beginning of 2009, the
housing segment has generated an increased
interest amongst end-users for affordable to
mid-end products and has resulted in an
increase in sales volumes in the residential
sector.
Cushman & Wakefield Research evaluated the
investment potential within the residential
market for a mid to long term horizon. It has
identified key micro-markets which on
evaluation against others, demonstrate
stronger fundamentals, making them viableinvestment opportunities:
Source : Cushman & Wakefield Research
City Location Investment Equity Internal Rate of term Return (IRR) - Post Tax
Bangalore North & North East Bangalore 3-5 years 30-32%
NCR Golf Course Road Extension 3-5 years 33-35%
Mumbai Lower Parel 3-5 years 37-38%
Investment Opportunities in Development Projects
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Locations in North and North East
Bangalore (comprising of Hebbal,
Yelahanka, Sahakarnagar, Jakkur, Coffee
Board Layout, HRBR and HBR Layout,
Banaswadi, Off Kempapura Road,
Amruthahalli, Hennur Road, Thanisandra
Road, etc) are considered to be favourable
investment options in the mid term.
Among the key attractions of the locationare good connectivity, improved social
infrastructure, proximity to destinations
like ORR (Hebbal-Sarjapur) and
equidistant from CBD/Off CBD micro
markets.
With growing commercial development in
the ORR stretch, there is an increasing
demand for residential development in the
above mentioned residential catchments.
The total residential stock in these micro
markets is approximately 6,500 units,
with majority of them purchased; while
approximately 7,000-8,000 units are
expected to be added to the stock over the
next 3-4 years, the majority being in the
mid-range category. The residential
demand for Bangalore is expected to be
approximately 500,000 units in the next
few years and a significant share is likely to
be catered in the above mentioned micromarkets.
BangaloreNorth & North East Bangalore
The physical infrastructure and the
connectivity in this region are favourable,
including proximity to the airport. There
are many educational institutions and
hospitals in and around these micro
markets. Approximately 1.5 million sq ft.
of the retail mall supply is also planned for
the next 3-5 years. Additionally other
organised retail in the form of supermarketsand standalone stores also have an active
presence in a few of these locations.
North & North East, Bangalore
?Residential Demand forBangalore estimated at 500,000units in five years
?Preferred location for Mid rangedevelopments
?
Expected investment returnsfrom development projects 30-32%
3. We have considered high-end apartments/villas with an area of approximately 2,500-5,000 sq.ft.
The values for mid range properties are for apartments with an approximate area of 1,200-2,000 sq.ft
3The average current capital values for the
mid-end sector is INR 2,800-4,000 per
sq.ft; while that for the high-end properties
(Jakkur and Hebbal) are in the range of
INR 5,500-7,000 per sq.ft. From a
medium term perspective, investment in
north and north east micro markets
mentioned above are likely to have an
Equity IRR (post tax) of 30-32%.
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Within NCR, Gurgaon's Golf Course
Extension (the stretch from the end of Golf
Course Road to Sohna Road) offers large
land parcels which have the potential to be
developed as prime real estate property in
medium term. There are currently only two
residential projects in this location, both of
which have been rapidly absorbed and are
now commanding premium in thesecondary market. The location is currently
witnessing strong interest from both end
users and investors, so while the location is
attractive, the right product mix, project
design and implementation will also be
essential for the success of the project.
Adjacent to this corridor there is also a
proposed commercial development zone (in
Sectors 62, 64 and 65) as per the master
plan which will ensure commercial activity
in the future and would support potential
buoyancy in capital values. There is also the
proposed metro route along this road in
addition to the existing 4 - laned road
ensuring smoother traffic movement and
connectivity if the planned infrastructural
projects are completed in time. The Delhi
Airport is about 15-18 km, while the
nearest Metro terminal at City Center is
approximately 7 km. The NationalHighway - 8 (Jaipur Expressway) and
National Capital RegionGolf Course Road Extension, Gurgaon
Mehrauli Gurgaon Road the two
existing links to Delhi are both in close
proximity. The existing and proposed
infrastructure would ensure a potential
upside on the capital values as these
infrastructural projects get completed.
Golf Course Road Extension,
Gurgaon
?Proximity to InternationalAirport and upcoming Metroterminal
?Preferred location for Mid rangeprojects
?Expected investment returnsfrom development projects 33-35%
Golf Course Extension currently will feed
off Golf Course Road and Sohna Road
infrastructure. However, in the near future,
various hotels, malls, hospitals and schools
are expected to become operational, with
more proposed to come up in the next 3-54
years. The average current capital values
for the mid-end sector are in the range of
INR 3,000-4,000 per sq.ft; while that for
the high-end properties are in the range of
INR 4,500-5,000 per sq.ft. The expected
equity IRR (post tax) from residential
development projects would be in the range
of 33-35%.
4. We have considered high-end apartments/villas with an area of approximately 2,000-4,000sq.ft.
The values for mid range properties are for apartments with an approximate area of 1,000-2,000 sq.ft
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Equidistant from the northern suburbs
(Bandra Andheri) and South Mumbai
(established CBD) the micro markets of
Lower Parel and Parel are emerging as one
of most attractive investment destinations
in the residential sector in Mumbai. When
compared to south Mumbai and even
Bandra, where there are limited
opportunities for further developmentowing to non availability of land parcels,
Lower Parel and Parel offer large tracts of
land for development in the heart of the
space starved city, largely due to opening
up of mill land for redevelopment .
Lower Parel and Parel micro markets lie in
proximity to key commercial hubs like
Nariman Point and Bandra Kurla Complex
(BKC) and has good connectivity to other
locations across the city through rail and
road networks. Additionally, the presence of
existing retail hubs (Phoenix High Street
and other retail projects on the anvil) along
with several hotels give this location the
right mix for a successful residential
precinct. Another major factor favouring
this location is its transformation into an
alternate business district. Having the
above advantages, the location is also an
attractive end user residential market ascurrently mid range residential apartments
are priced approximately 30% - 40% lower
than south and south Central Mumbai.
MumbaiLower Parel & Parel
Thus demand for residential space in this
location is expected to be bullish from both
end users and individual investors'
perspective.
5The average current capital values for the
mid-end sector are in the range of INR
13,000-25,000 per sq.ft; while that for the
high-end properties are in the range ofINR 34,500-55,000 per sq.ft per. The
expected equity IRR (post tax) from
residential development projects would be
in the range of 37-38%. The residential
demand for Mumbai, as mentioned earlier,
is approximately 1.6 million units in 5
years; and a significant share of this
demand is likely to come up in the above
mentioned micro market.
Lower Parel & Parel
?Availability of large tracts of millland
?Preferred location for high endand mid end projects
?Expected investment returnsfrom development projects 37-38%
The location boasts of good connectivity
through rail (both central and westernrailway stations are about 1-2 km away)
and road networks. The micro market is
about 11 km from the domestic airport and
about 14 km from the international airport.
5. We have considered high-end apartments/villas with an area of approximately 3,000-5,000 sq.ft.The values for mid range properties are for apartments with an approximate area of 1,7002,500 sq.ft
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The Indian hospitality sector witnessed
unprecedented growth over the last few years.In the next 3-5 years too, new hotel
developments are expected in various
Source : Cushman & Wakefield Research
City Category Investment term
Mumbai Mid Scale 3-5 years
Gurgaon Mid Scale 3-5 years
Hyderabad Mid Scale 3-5 years
Kumarakom (Kerala) Luxury 3-5 years
Hospitality Marketcategories across different cities in the
country. The quantum of new supply enteringthe market against the current demand has
initiated a new trend amongst investors,
where innovative concepts are viewed to have
potential based on the extended value
proposition derived from the product to
achieve a development model that is
perceived to be profitable.
The last few years witnessed a series of mixed-
use developments designed to help hedge
future cash flow risks, providing the investor
with the ability to absorb the initial years of
low profitability from a hotel product.
However, it has been noted that the demand
environment over the last three years has been
conducive to provide reasonably short
stabilisation and payback on hotel
developments.
Going forward, it is likely that incremental
and new hotel developments (in addition tothe inventory proposed to enter the market)
will be based on new and innovative models
with investors seeking to achieve stable
returns. Based on our experience of the
market, we have identified the following
micro-markets for investment in the
hospitality segment for the next 3-5 years:
Investment Opportunities in Development Projects
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The main demand driver for the growth
and sustenance of the hospitality industry
in Mumbai is the steady flow of leisure and
business travelers from across the globe.
Being the financial capital and a near
essential stop over for travelers, demand for
hospitality in the city has historically
grown faster than most other tier 1 cities in
the country. The rising demand for office
space has also been instrumental in
strengthening the need for additional room
nights, especially keeping on the anvil the
year-on-year growth of domestic and
international business travelers. The
development of suburban locations as
alternate commercial micro-markets to
Nariman Point, has also seen substantial
growth in the branded star category hotels
in the locations around Andheri, Bandra-
Kurla Complex, Juhuand Santa Cruz.
MumbaiMid-Scale
Although Average Room Rate (ARR) has
undergone a correction of 4% in the last
two years, occupancy levels have remained
strong. The current stock of approximately
Mumbai
?Good potential for Mid-scalehotels
?Hospitality demand backed bydemand for commercial space
?Average occupancy rate 58-60%
?Healthy return of 18-20%
2,100 mid-scale rooms with an average
occupancy level of approximately 70%
seems to be inadequate for the projected
demand in spite of the 1,400 rooms that
are likely to be added in the next 2-3 years.Despite high land and input costs,
investments in this segment are likely to
generate returns of approximately 18-20%
in the medium term.
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Gurgaon - National Capital RegionMid-Scale
Development of business districts and
IT/ITeS clusters in Gurgaon has
contributed to the incremental rise of
business travelers in this region. Till a few
years back there were only a few branded
operators, in this location with the
hospitality scene being dominated by local
players. The increasd interest in developing
the hospitality sector in the location
coincided with the commercial office space
boom in Gurgaon which led to the rise in
demand for room nights, triggering the
development of mid-scale hotels for
business and Meeting, Incentive,
Conference and Exhibition (MICE) travelers
to the city.
The existing stock of mid-scale rooms in
Gurgaon is approximately 1,000-1,200
with an average occupancy rate of 58-60%.Average room rates for the city in the mid-
scale category are in the range of INR
5,500-6,000. Upcoming supply in this
category over the next 3-5 years is expected
to add another 1,000-1,050 rooms to the
city.
Backed by the demand estimation for
commercial office developments in
Gurgaon for the next 3-5 years, the city is
expected to grow as a healthy market for
the mid-scale hotel category, generating
enough demand for room nights. Given
that land is usually acquired in lead time of
4-5 years at the then prevalent prices, new
project developed in proximity to office
locations can generate upto 20-21% return
on investment.
Gurgaon
?Good potential for Mid-scalehotels
?Hospitality demand is backed bydemand for commercial space
?Average occupancy rate 58-60%
?Healthy return of 20-21%
Upcoming locations that hold potential for
investments in the mid-scale category in
Gurgaon include the stretches along Golf
Course Road and NH 8 (Gurgaon to
Manesar).
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Traditionally Hyderabad has had multiple
business districts spread across the city,
including locations of Somajiguda,
Ameerpet, Nampally, Banjara Hills,
Kukatpally and the Charminar. This led to
the hotels being established in proximity to
these business districts. Indian Hotels
Company Ltd (IHCL) with a room
inventory of over 500 had the longest
presence in the city. ITC Hotel The
Kakatiya, The Green Park, Hampshire
Plaza and the Marriott Hyderabad Hotel &
Convention Centre, were other prominent
city hotels. The average occupancy in
Hyderabad is estimated to be 58-62%. Till
the emergence of the IT/ITeS and Biotech
sectors, the city saw no new branded hotels.
However, boosted by the demand for room
nights generated by the growth of new
commercial office spaces, Hyderabad began
to see a host of new brands come up in the
periphery, especially in and around
Madhapur, the city's IT hub.
The development and establishment of
HITEC City has had a number of
implications on the city's hotel market in
the creation of a new captive micro-market,
resulted by a shift in demand centres. Our
HyderabadMid-Scale
research indicates that a considerable
amount of demand for city hotels in the
mid-scale category is generated in this new
region. The development and operational
commencement of mid-scale hotels in the
HITEC City (e.g. Trident, Westin, Lemon
Tree, Quality Inn, etc.), including those
that are currently in planning or
development stage are all likely to result in
Hyderabad
?Good potential for Mid-scalehotels
?Hospitality demand isconcentrated in HITEC Citybacked by IT/ITeS demand
?Average occupancy rate 58-62%
a self sufficient market, with only the spill-
over demand from the area being
accommodated by other city hotels. The
total supply in this new market is currently
top-heavy, with a large proportion of hotel
supply being in the upper mid-market,
upscale or luxury segments with negligible
mid- scale options, therefore a good
opportunity for the mid-scale category
exists.
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Kumarakom, as a leisure destination, is
increasingly being viewed as an
international spa retreat, focusing on
Ayurveda whilst providing a unique
backwater leisure experience matched only
by a few other destinations worldwide.
Kumarakom was historically considered as
an international leisure destination,
however as per Cushman & Wakefield's
research, the destination is also
experiencing considerable demand from the
individual and group domestic leisure
market, as well as from MICE travellers for
Indian and multi national corporates.
Kumarakom has performed reasonably well
over the past three years, achieving average
occupancies and rates of between 60% and
65% and INR 7,800 and INR 8,000 in
2006 and 2007, respectively. Despite thedecline since mid-2008, there are
Kumarakom, KeralaLuxury
expectations of a market revival by 2009-
10, initiating greater sales and marketing
efforts for target segments.
Kumarakom
?Good potential for luxury hotels
?Demand driven by leisure andMICE travellers
?Average occupancy 60-65%?Viewed as international Spa
Retreat focusing on Ayurveda
Kumarakom provides a unique cultural and
environmental experience matched only by
a few other markets and therefore is likely
to be able to retain its market share
compared to other competitive leisure
destinations. It is also likely that leisure
travel will experience a quicker revivalcompared to corporate travel, encouraging
leisure travelers to this destination.
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The first quarter of the current year and the
second half of 2008 witnessed significant
decrease in investments owing to the
prevailing recessionary conditions. Being a
synchronised recession, the severity or
aftermath defied most forecasts. However, asthe global recession softens to give way to the
much anticipated green shoots in the
economy, industrial sectors in India have
witnessed a positive growth, thereby
Investment Scenarioimpacting the GDP growth outlook. Indian
realty market is also showing signs of recovery
which is expected to continue presenting
opportune times for investors to take medium
to long term possessions. In addition to this,
yield expectations, which were experiencingupward pressure, are gradually stabilising and
are likely to see a marginal decline in the
coming months.
22
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Foreign Direct Investment in IndiaThe overall FDI equity inflow has gained
some momentum in the last two quartersaccruing to a total of INR 646,600 million
from January 2009 - August 2009. There was
also an increase of nearly 28% in the FDI
inflows since the second half of 2008. Fiscal
stimulus packages and increased
regulations/policies to improve the economy
have had a positive impact on the FDI inflow
too.
Maharashtra continues to be the most
attractive investment location for
Institutional Investors. This location
attracted a cumulative FDI inflow of INR
563,721 million from third quarter of 2008
to second quarter of 2009 with a steep hike inJanuary 2009.
While NCR, despite receiving low
investment to the tune of approximately INR
16,517 million in last two quarters of 2008
and the first quarter of 2009, ranked second
due to substantial quantum of investment in
the second quarter of 2009. Karnataka on the
other hand has continued to witness slow and
gradual cumulative FDI equity inflow of INR
67,179 million from third quarter of 2008
second quarter of 2009.
FDI Equity Inflows (RE & Housing Sector)
0
Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209
20,000
40,000
60,000
80,000
100,000
-20,000
-40,000
INRmillion
Source : Department of Industrial Policy & Promotionand Cushman & Wakefield Research
FDI Equity Inflows
0Q307
INRmillion
Q407 Q108 Q208 Q308 Q408 Q109 Q209
100,000
200,000
300,000
400,000
500,000
Source : Department of Industrial Policy & Promotionand Cushman & Wakefield Research
FDI Equity Inflows in Prominent States
50,000 100,000 150,000 200,000 250,000 300,000 350,0000
INR million
Maharashtra, Dadra & Nagar Haveli, Daman & Diu
Delhi, Parts of UP and Haryana Karnataka
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Source : Department of Industrial Policy & Promotionand Cushman & Wakefield Research
FDI in Real Estate & Housing SectorThe inflows into real estate and housing
sector dropped by a huge margin during thelast two quarters of 2008 accounting for a
total quantum of INR 34,360 million. While
2009 started on a good note, there was asignificant equity inflow of INR 97,880
million in the first half of 2009, an increase
by 1.8 times. The slowdown in the real estate
sector has had adverse impact with one of the
key fallouts being that of investors closely
scrutinizing the projects/developer profile
(debt position) before investing in any project
apart from scope for good/moderate yields and
easy exit.
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6An analysis of investment in the real estate
sector shows that 36 deals have taken placebetween August 2008 - August 2009, which
suggests that similar to last year, Special
Purpose Vehicle (SPV) accounted for the
highest number of deals at approximately 42%,
Current Investment Scenarioas it caters to a single project, where the risk
is low with quick returns and easier exitoption. This is followed by the Entity level
deals estimated at 28%. QIPs, a more recently
considered alternate investment type,
accounted for 22% of the total deals in this
period while Portfolio level investments made
up the remaining 8%. However, unlike last
year where most of the investment was in the
SPV level, there has been a more equitable
distribution amongst all PE deals.
The total quantum of PE deals announced
during the time frame under consideration is
approximately INR 203,000 million of which
QIPs account for majority share of 60% at
approximately INR 122,000 million. The
average size of QIP level deals is
approximately INR 15,300 million. Both
SPV Level and Entity level deals saw similar
quantum of investment of INR 29,000
million and INR 28,000 million with an
average deal size of approximately INR 1921
million and INR 2813 million respectively.
Portfolio level investments accounted for INR
24,000 million, subjugated largely by a
single deal of INR 20,000 million invested
by IREO III in Orange Realty.
Announced PE deals in the RE sector
0SPV
EquityInflow(INR
million)
Entity Portfolio
20,000
0
20
Announce
dDea
ls(n
um
ber)
Quantum of announced deals (Aug 15 2007 - Aug 15 2008)
Quantum of announced deals including QIP (Aug 15 2008 - Aug 15 2009)
Number of announced deals (Aug 15 2007 - Aug 15 2008)
Number of announced deals including QIP (Aug 15 2008 - Aug 15 2009)
40,000
60,000
80,000
100,000
120,000
140,000
160,000
40
60
80
SPV Portfolio Entity QIP
12%
60%
14%
Distribution of PE deals announcedin the RE Sector (INR 203,000 million)
14%
Source : Compiled by Cushman & Wakefield Research
6. Indicative sample of announced deals from mid-August 2008 to mid-August 2009 in the Indian real estate sector. This does not includeinfrastructure and proposed deals.
SPV Portfolio
42%
28%
22%
Distribution of PE deals announcedin the RE sector (36)
Entity QIP
8%
Source : Compiled by Cushman & Wakefield Research
25
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It is noteworthy to state that investment is
lower by 24% over last year. The total
number of deals (including QIPs) reduced by
a significant 46% year-on-year. Investors havebeen cautious and selective about the asset
classes, location, developer profile (debt
position) while deciding on the project for
investment leading to a significant drop in
the numbers as well as the volume of deals.
The asset class - wise distribution shows
preference towards the residential sector
which grossed up the highest share (17%)
followed by township (5%). Commercial,
retail and hospitality sectors witnessed a
major decline in investments over the
previous year, grossing only marginal share of
1 - 2%. These sectors are expected to remain
under par till the demand gains significant
momentum.
Distribution of PE deals across asset classesin RE Sector (INR 203,000 million)
Residential Hospitality Mixed Use
17.0%0.9%
1.8%
0.7%
5.0%
0.7%
73.9%
Retail
Township Office Entity
Source : Compiled by Cushman & Wakefield Research
Note: The study has been conducted on an indicative sample of announced deals from mid-August 2008 to mid-August 2009 in the Indianreal estate sector. This does not include infrastructure and proposed deals.
Region-wise distribution of PE deals during
the period under consideration indicates a
clear drift in investment towards the north
region (48%). This can be largely attributedto two huge QIP's raised by Unitech and DLF
during the first half of 2009. Western region
(37%) saw a huge inflow of investment across
all categories - SPV, Portfolio and Entity level
deals.
With signs of steady economic recovery like
strengthening stock market, growth in trade
and industrial production, backed by
inherently strong fundamentals of the Indian
economy, the interest amongst investors in
the Indian real estate market is also reviving.
This can be inferred from the fact that
majority of both PE deals and FDI's in the
realty sector took place between April
August 2009.
48%
15%
37%
Distribution of PE deals across region(INR 203,000 million)
North South West
Source : Compiled by Cushman & Wakefield Research
Representative Private Equity Deals
?IREO Investment Holding III invested
INR 20,000 million in Orange Realty
for setting up of SEZ, IT/BPO Parks,and development of real estate projects.
?Och-Ziff Invested INR 270 Croroes in
Marvel Realtors on the residential and
commercial projects in Pune.
Source: Complied by Cushman & Wakefield Research based on publicly available information through media and other sources
?Kotak Realty has picked up 50%
holding in an integrated township of 5
million sq.ft at Kapra by JanapriyaProjects for INR 10,000 million.
?Swiss-German Fund MPC Synergy
invests USD 296 million in Phoenix
Mills for its various special purpose
vehicles.
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The initial impact of the global recession was
limited in India, with a marginal deceleration
in the GDP to 7.8% in April-September
2008 as against 9% in fiscal year 2007-08.
However, it was only after September 2008,
with the Wall Street collapse that the
country's economy began to feel therepercussions in true earnest and the growth
rate plunged to around 5.8-6.1% for the next
three quarters. Although this was a
considerable drop from the earlier 9%, it was
still higher than the World Bank's forecast of
4% for India in 2009. A year later, the Indian
economy has managed to fare better than
many of its global counterparts, and is
steadily on the road to recovery.
With signs of economic stabilisation and
moderate global economic growth forecasted
for 2009-10, property markets in India have
begun to exhibit signs of a revival from the
second quarter of 2009. Attracted by
correcting values, investors and end-users
alike have begun to reconsider the market,
accelerating activity in the Indian realty
sector. With the return of liquidity in recent
months via FDI, QIPs, non-core asset sales
and banks reconsidering lending to the realty
sector cash flows of realty players have also
improved.
Though the Net Asset Values (NAV) of major
real estate developers across Asia are still
below the levels they were a year ago, India is
currently witnessing the most significant
downward revisions. This also means that
India will have the best prospects, amongst
The Road Aheadfor Realty
other Asian nations, for NAV upgradation
including a positive NAV revisions potential
for the next four quarters, should the
economic improvement continue at the same
pace. Even though the overall demand for real
estate saw a decline in 2009, an improving
economy, backed by strong fundamentals,suggests that the sector is likely to see a
demand growth in the long-term.
India's large domestic market is one of its
biggest economic assets, accounting for the
largest share of the demand pie. India, for
instance, has an unmet housing shortage of7
approximately 25 million units , which alone
offers a huge growth potential for the realty
sector in India; besides a growing acceptancefor low-cost and affordable housing projects
even in a downtrend. India's sizeable pool of
technically qualified manpower is yet another
domestic strength, together with a stable
internal policy framework that has withstood
turbulent times.
Factors, such as the above, make India an
attractive investment destination. According
to the favourable outlook of the Ministry of
Commerce & Industry, FDI into India is
expected to be at least USD 40 billion in the
fiscal year ending in March 2010. It is
noteworthy that even under strained
circumstances, India managed to attract FDI
inflows of approximately USD 10.53 billion
in the period from April-July 2009, higher
than other emerging economies. With the
economy inching towards recovery,
investments into the country are expected to
see regular quarterly increments.
7. Union ministry for Housing and Urban Poverty Alleviation
28
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Cushman & Wakefield is the largest privately owned real estate services firm in
the world with more than 15,000 professionals in 230 offices in 58 countries. The
firm delivers integrated solutions by actively advising, implementing and
managing on behalf of landlords, tenants and investors through every stage of
real estate process. C&W also provides valuation advice, strategic planning and
research, portfolio analysis, and site selection and space location assistance,
among many other advisory services.
Cushman & Wakefield commenced its India operations in 1997 and today has
grown to over 1,200 employees working from the firm's New Delhi, Gurgaon,
Mumbai, Bangalore, Chennai, Hyderabad, Pune and Kolkata offices. The first
international real estate service provider to have been granted permission by the
Government of India to operate a wholly-owned subsidiary, Cushman &
Wakefield in India is strategically poised to service the varied needs of clients
throughout the sub-continent. The firm offers a full range of real estate services
combining local expertise and experience with technology and standards of
service that are consistent across all Cushman & Wakefield's offices worldwide.
To find out more about Cushman & Wakefield, visit www.cushmanwakefield.com
This report contains information available to the publ ic and has been relied upon by Cushman & Wakefield on the basis that it is accurate and complete. Cushman & Wakefield accepts
no responsibility if this should prove not to be the case. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained
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Changes in socio-economic and political conditions could result in a substantially different situation than those presented at the stated effective date. C&WI assumes no responsibility
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Copyright 2009 Cushman & Wakefield (India) Pvt. LimitedAll Rights Reserved
The GRI is a global club of senior real estate investors, developers and lenders. Its
mission is to help its members build personal relationships and work together in
creating better places as a legacy to our children. Founded in 1998, its core
constituency consists the world's leading real estate players.
The GRI runs its activities through a series of Annual Meetings focused on
different regions of the world, mainly across Europe and Asia to date. Individual
and Corporate Membership of the GRI is open to senior players in the real estate
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in their industry.
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For further information on the report, pleasecontact:
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