INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH

Transcription

1 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH A Cushman & Wakefield Research Publication OCTOBER 214

2 CONTENTS Executive Summary 1 Global Economy and India 2 Investment Landscape 7 Demand - Supply Gap Analysis 12 - Residential Sector 12 - Commercial Office Sector 15 - Retail Sector 19 - Hospitality Sector 22 Conclusion 25

3 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH EXECUTIVE SUMMARY After a subdued year of growth in 213, 214 began on an optimistic note for the global economy. However, unforeseen calamities and events spoilt the party in the US and the Eurozone. The US economy contracted during the first quarter of 214 (due to severe weather) and is now expected to grow by 2.1 percent versus an earlier prediction of 2.8%, according to World Bank estimates. Despite being mired in geo-political tension, the Eurozone currently has no threat of facing a deflation, even as growth forecasts for 215 have been cut. In Asia, the leading emerging economies of India and China had suffered a slowdown in growth over the past couple of years. However, both economies seem to have arrested this trend in 214. Specifically, India's GDP growth for first quarter of was recorded at 5.7%, a significant improvement from 4.6% registered in the preceding quarter. In fact, this was India's fastest quarter-on-quarter growth in the last two years. Notably, the manufacturing sector bounced back from a contraction of 1.4% in Q4 213 to an expansion of 3.5% during the first quarter. The Consumer Price Index (CPI) in August was noted at 7.8%, dropping from 8.28% noted in May 214. Backed by the expectation of a revival, other investment trends are also looking strong; for instance, total Foreign Direct Investment (FDI) in India has shown a growth of 52% during H1 214 compared to the same period last year. Private equity (PE) investment in real estate also witnessed an upsurge, with investments in 214 surpassing 213 levels by 21% during the first three quarters itself. Cross border investments reached a four year peak due to attractive valuations and stable yields. With increased confidence of global investors, fund houses have been able to raise hefty corpuses. Moreover, measures such as the introduction of Real Estate Investment Trusts (REITs) and relaxation of FDI norms is expected to generate capital infusion for the real estate sector. emphasizing on inclusive growth by making India a global manufacturing hub (with the Make In India initiative) and relaxing VISA norms. Through its dialogue, announcements and actions, the government has insisted on bringing about change through development. Among other initiatives, it has also enumerated that it wants to build 1 'smart' cities in India and allocated funds towards it. The implication of 1 'smart' cities, bullet trains and allied infrastructure developments can hardly be exaggerated; it will have critical links to sectors such as real estate, manufacturing, cement, construction and will impact employment positively. Therefore, the improvement that we have so far seen in the Indian economy will increase manifold as policy measures are transformed to action. In this report, Cushman & Wakefield aims at exploring the true potential of the domestic real estate market against the backdrop of the optimistic economic outlook and changing regulatory landscape. The report studies recent trends of investments in different real estate asset classes and projects future investment destinations. It deep-dives into thriving micro markets located in 1 the top eight cities of India and analyses both demand and supply, creating a style guide for investors. Overall, this report delves into the current status of the different fractions of the Indian real estate industry and makes inferences through future projections within the context of both global and domestic economic factors. 1 Top 8 cities includes Ahmedabad, Bengaluru, Chennai, Delhi-NCR, Hyderabad, Kolkata, Mumbai and Pune Much of the exuberance that is being witnessed in India stems from the recent Parliament election results. The landslide victory of Prime Minister Narendra Modi led National Democratic Alliance (NDA) has not just brought about a stable political center but also cleared the policy paralysis that India suffered from in the past couple of years. Moreover, the Modi led government is now taking steps to ensure that its development agenda can be implemented; this is evident from the Prime Minister's meetings with Japan and China and his recent tour of the United States, generating funds for large infrastructure projects, stressing on the importance of removing bottlenecks, 1

4 October 214 A Cushman & Wakefield Research Publication GLOBAL ECONOMY AND INDIA GLOBAL ECONOMY The world economy experienced another year of subdued growth in 213. Underperformance was witnessed in almost all major economies across the world, including emerging ones, which had already suffered notable slowdown in growth rates in 211 and 212. The US economy contracted during the first quarter in 214 (due to severe weather issues) and is now 1 expected to grow by 2.1% versus an earlier prediction of 2.8%. Despite an overhang of geo-political tensions (in Eastern Europe) and high fiscal deficit (especially in southern European economies), the International Monetary Fund (IMF) says that industrial production rose in Europe in the current year and that the region (Eurozone as a whole), is expected to grow in 214. The European Commission has assured that there is no threat of deflation even as growth forecast for 215 has been cut. Overall, it must be noted that projections for are optimistic. According to World Bank, the global economy is expected to pick up speed and grow at 3.4% in 215 and 3.5% in 216. The share of high income economies in global growth is also expected to improve from a low of approximately 4% in 213, as per World Bank. Importantly, according to latest statistics, expert opinions and expected outcome of policy measures undertaken, China and India are expected to have arrested any further slowdown of GDP rates in their respective economies; it is believed that their growth rates are now poised to strengthen. According to the World Investment Report 214 by the United Nations Conference on Trade and Development (UNCTAD), global FDI flows rose to USD 1.45 trillion (tn) in 213, an increase of 9% over the previous year. FDI inflows in developing countries reached a new high of USD 778 billion (bn), constituting 54% of the total FDI flows. UNCTAD forecasts that FDI flows could rise to USD 1.6 tn in 214, USD 1.7 tn in 215 and USD 1.8 tn in 216 as economic recovery in developed economies is anticipated to drive investments. Though developing countries received higher FDIs than their developed counterparts in 213 a reversal in trend is expected in the next three years. Long term interest rates are expected to rise in developed economies, leading to an increase in the yield of their government bonds, adversely impacting FDI inflows to the developing countries. As per UNCTAD, FDI outflows from developing and transition 2 economies reached a record level in 213, contributing 39% of global FDI outflows or USD 553 bn as Transnational Corporations (TNCs) from developing economies are increasingly acquiring foreign affiliates from developed countries TOP PROSPECTIVE INVESTMENT DESTINATIONS FOR China (1) 2 United States (2) 3 Indonesia (4) 4 India (3) 5 Brazil (5) 6 Germany (6) 7 United Kingdom (9) 8 Thailand (8) 9 Vietnam (11) 1 Russian Federation (11) 1 Australia (13) 12 France (16) 13 Poland (14) 13 Mexico (7) 15 Malaysia (16) 15 Japan (1) 17 Singapore (22) Source: UNCTAD World Investment Report 214 (x) = 213 ranking Developed economies Developing and transition economies Note: Percentage of respondents selecting economy as a top destination located in their regions. Corpuses of Private Equity (PE) firms touched a record level of more than USD 1. tn, raising hopes of increased PE FDI going forward. The subdued growth in the global economy still remains a concern as 213 proved to be another dampener with a growth of 2.4%. Since the global economy displayed distinct signs of strengthening during the second half of 213, expectations of growth rose for 214. The year 214 began with robust growth expectations from economies such as Japan, United States, United Kingdom and Germany. But, geo-political tensions such as the Russia-Ukraine stand-off in Eastern Europe and the crisis brought about in Syria and Iraq by the Islamic State of Iraq (ISIS) have resulted in some uncertainty adversely affecting business sentiments. Consequently, a weak first quarter performance by several major developed economies along with a few emerging ones led to a downward revision in January 214 forecasts for some countries. 1 World Bank 2 Transition economies: South-East Europe, the Commonwealth of Independent States and Georgia. 2

5 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH GDP GROWTH FORECAST FOR 214 Canada 2.2% U. S % * UK 3.2% Euro Zone 1.1% Russia.2% China 7.4% Japan 1.6% Mexico 2.4% India 5.4% Brazil 1.3% South Africa 1.7% Source: IMF World Economic Forecast, July 214 and * World Bank THE INDIAN ECONOMY Increasing CPI, widening Current Account Deficit (CAD), a depreciating rupee along with sluggish growth in manufacturing and industrial production led the Indian economy to grow at sub st st 5% for another year in FY 214 (Financial Year - 1 April to 31 March). At 4.7% in FY 214, the growth in economy was marginally higher than previous year's growth of 4.5%. The Reserve Bank of India (RBI) had intervened since last September with strong measures to provide support to the rupee and control inflation. Since then, the RBI raised the benchmark lending rate the Repo Rate by 75 basis points to 8% with a target to bring down inflation. High import duty on select items and measures such as twin swap windows were put in place to boost FOREX reserves. By the end of FY 214, CAD had fallen to 1.7% of GDP from 4.7% in FY 213. This was primarily due to sharper decline in imports than in exports. The rupee also gained some lost ground and appreciated by 15-16% from the lows of 213. In May 214, India elected a new Central Government, with a clear majority in the lower house of Parliament - after 3 years. Led by Prime Minister Narendra Modi, the NDA has enthused the investor and business confidence in the Indian economy both nationally as well as internationally. GDP Growth (%) INDIA: KEY INDICES Apr-Jun Jul-Sep 212 Oct-Dec Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar GDP Growth (%) CAD/GDP (%) Source: Reserve Bank of India and Central Statistics Organization The NDA government has announced a slew of infrastructure development plans such as revitalizing the Special Economic Zones (SEZs), developing a number of Industrial Corridors, developing 1 'smart' cities, introducing high-speed bullet trains and i-ways for providing web connectivity across the country, etc. that would pave the way for faster growth. The government is also mulling easing the land acquisition laws to improve accessibility to land. Apr-Jun CAD/GDP (%) 3

6 October 214 A Cushman & Wakefield Research Publication The FDI cap has been raised to 1% in Railways (select operations) and 49% in the defense and insurance sector. The capital markets regulator the Security and Exchange Board of India (SEBI) approval to set up Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) is expected to bring in the necessary large volumes of capital investments required to address the huge shortages in real estate and physical infrastructure. The rupee is further cushioned against further Quantitative Easing (QE) by the US fed, as FOREX reserves are near an all-time high of USD 32 bn. Consequently, the Indian stock market indices have been touching new highs. The Indian economy posted a growth of 5.7% in the April-June quarter of 214, the highest in the last two years, led by considerable growth in manufacturing, power and construction sectors. Japan has committed to invest nearly USD 35 bn over the next five years in infrastructure projects, whilst China has committed USD 2 bn in the next five years in infrastructure projects and industrial parks. With strong signs of a turn-around and positive macro-economic parameters such as shrinking CAD and lowering inflation, experts are already revising their full year target for FY 215 upwards. The Indian economy has huge potential for growth and requires the new government to take steps towards further financial and administrative reforms while also ensuring their swift implementation. Reducing structural bottlenecks will provide the necessary boost for key projects in pipeline. Reigning in the inflation will be vital for spurring consumer demand, which in turn would lead to wider economic recovery. The government has a tightrope walk ahead, balancing growth and deficit while the RBI does a balancing act between inflation and growth to decide on key interest rates. REGULATORY UPDATES & POLICY MEASURES FOR THE REAL ESTATE SECTOR During the past few years, the Indian real estate sector has had to confront tough times; difficult economic and business environment and high inflation affected all stakeholders such as occupiers, investors, developers and home buyers. As a result, significant unsold inventory and execution delays were prevalent in almost all real estate classes during the past couple of years. In the last few months, policy makers have taken several initiatives to revive the real estate sector and improve investor and buyer confidence. Discussed below are key regulatory changes/policy measures that are likely to transform the Indian real estate sector. 1. Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act: In force from January this year, this Act updates the norms for land acquisition (earlier Land Acquisition Act was introduced in 1894) and also addresses issues pertaining to rehabilitation and resettlement (R&R) of those dependent on the land being acquired by the government. As per the Act, developers will need consent of 8% of residents/ owners whose land is acquired for private projects and 7% in case of Public-Private Partnership (PPP) projects. Moreover, the Act provides for compensation of up to four times the market value in rural areas and up to two times in urban areas. This Act also defines the timelines for conducting necessary procedures in land acquisition such as six months for Social Impact Assessment (SIA), R&R package, public hearings and enquiry into any objections. It also insists on awarding R&R within 12 months of declaration of land identified for acquisition. The Act also incorporates penalties for delays in compensation and R&R. As aptly reflected in the Act's title, the principle objective is fair compensation, thorough resettlement and rehabilitation of those affected and adequately safeguarding their wellbeing along with bringing in higher level of transparency. 2. Relaxation of Foreign Direct Investment (FDI) Norms: FDI norms for investing in real estate projects (such as townships, housing, built-up infrastructure, etc.) were relaxed in this year's Union Budget. Reduction of minimum built-up area requirement for FDI compliant projects from 5, sq. m. to 2, sq. m and minimum investment limit from USD 1 million (mn) to USD 5 mn is likely to boost foreign fund inflows significantly. This will bring in both capital and expertise, ensuring development of sustainable and quality urban housing in India. In addition, this will boost urbanization especially in tier II and III cities, which are struggling to develop large projects as developers are wary of taking up such ventures. In addition, as per the revised regulations, if a project commits 3% to affordable housing, the minimum capitalization and minimum area criteria (of FDI) will be non-applicable. This will provide a significant boost to affordable housing as it opens up a funding avenue to developers who typically find affordable housing projects unviable due to increasing land and financing costs. This regulatory change is likely to bring in significant capital to the affordable housing sector and will provide some boost to the government's vision of Housing for All by

7 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH 3. Relaxation in norms for issue of long-term bonds by banks for financing affordable housing: With an aim to ensure adequate credit flow to the affordable housing sector, the RBI allowed issuance of long-term bonds by banks for raising capital. Lending to the affordable housing sector includes loans eligible under priority sector along with mortgage loans that are limited to INR 5 mn (for houses valued up to INR 6.5 mn in Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad) and up to INR 4 mn for houses valued up to INR 5 mn in other locations. 4. REITs: SEBI approved REITs regulations in September 214. The major highlights include: key parties in an REIT structure include: the trustee (registered with SEBI), the sponsor and the manager can raise funds through an initial public offer (IPO) and follow on offers once listed. should come out with an IPO within 18 months of registration with SEBI should have minimum asset size of INR 5 bn with a minimum initial offer size of INR 2.5 bn and a minimum 25% public float all units may be offered only to high net-worth individuals (HNI's) and institutions for whom the minimum subscription size will be INR 2, per investor and each unit size shall be INR 1, shall invest in commercial real estate assets, either directly or through Special Purpose Vehicles (SPVs) at least 8% of the value of REIT assets shall be completed (Occupation Certificate received) and rent generating (75% area leased out) at least 9% of the net distributable income after tax shall be distributed as dividends for unit holders The introduction of REITs will provide access to funding for developers, better valuations for commercial properties, access to individual investors in commercial real estate and a more structured and transparent commercial real estate market. Unlocking the value of good quality assets and creating liquidity through REITs show the maturity of the Indian real estate, as globally REITs are found in mature economies. In those economies, REITs have reduced individual speculation in real estate assets and allowed for more professional investment and management thereby increasing participation by multiple retail investors, invigorating transactions andbringing in more transparency. 5. Infrastructure Investment Trust (InvITs): InvITs have similar provisions as REITs with minor changes to suit investments in infrastructure projects in sectors such as transport, energy, water, sanitation, communication, social infrastructure, etc. The minimum subscription size has been prescribed at INR 1. mn per investor and each unit size has been decided at INR.5 mn. With the introduction of InvITs, a suitable structure for financing/refinancing of infrastructure projects, which require massive investments, is likely to evolve in India. Focus on building infrastructure will help reduce supply side constraints for various sectors and industries. 6. Real Estate (Regulation and Development) Bill: With the Central Government focussed on reviving the sector, the Real Estate (Regulation and Development) Bill may be introduced during the Parliament's winter session in November-December 214. The earlier United Progressive Alliance (UPA) government had introduced a version of this Bill in the upper house of Parliament the Rajya Sabha in 213, but it was not passed. The Bill entails the formation of a Housing Regulatory Authority (HRA) to ensure compliance of all obligations by the developer and increase transparency in the housing sector. A few mandatory conditions in this Bill include: a. Prior approvals: The Bill restricts launching or marketing of a residential project prior to securing necessary clearances. Presently, developers initiate projects in pre-launch stages and garner funds even though required approvals might not be in-place. However, in case the project is unable to get approvals/clearances, developers delay execution and is sometimes even forced to scrap it. Prior approvals will ensure that developers commence bookings only when projects receive a go-ahead from approving authorities. b. Separate account for funds: The Bill requires developers to deposit 7% of all proceeds in an escrow account to cover costs associated with a particular project. This will aid in timely completion, prevent diversion of funds to other projects, and as a result, protect buyer interests. 5

8 October 214 A Cushman & Wakefield Research Publication c. Mandatory disclosures: As per the Bill, developers will have to disclose details such as layout plans, plan of development works, land status, carpet area, number of the apartments booked, status of the statutory approvals, etc. on the HRA's website. This will ensure transparency in transactions and helps all stakeholders, including buyers and PE investors to take informed decisions. 7. Other Policy Measures: The tax exemption limit on personal incomes has been raised from INR 2, to INR 25, at a time when the country is recovering from a sustained period of high inflation. Such measures will help household savings. Additionally, the limit on home loan interest has been increased from INR 15, to INR 2,. Increased savings coupled with an increased tax benefit will go a long way in motivating home buyers who have been sitting on the fence for a few years, reeling under the pressure of high inflation and high interest rates. The Government intends to develop 1 'smart' cities and it has committed an initial amount of INR 7.6 bn to meet its target. Formation of such cities will mobilize employment, development and create new real estate markets. The first step towards this project was taken during PM Modi's recent visit to Japan, where he inked a MoU (Memorandum of Understanding) to assist in the transformation of his Lok Sabha constituency, Varanasi, into a smart heritage city on the lines of Kyoto. As discussed, a number of regulatory changes/policy measures have been initiated and are likely to bear a positive impact on the Indian real estate sector. Such policies will help reduce the risk perception associated with the sector and ensure greater transparency in transactions. This transformation is expected to attract larger global investments that will contribute to better real estate product offerings and a more vibrant, matured real estate sector. MAJOR REGULATORY UPDATES REGULATIONS STATUS Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act Relaxation in FDI norms for real estate sector Relaxation in norms for issue of long term bonds by banks for financing affordable housing Real Estate Investment Trusts (REITs) Infrastructure Investment Trusts (InvITs) Real Estate (Regulation and Development) Bill? Implemented from January 214 Approved in July 214 Approved in July 214 Approved in September 214 Approved in September 214 Likely to be introduced in the winter session of Parliament (Nov-Dec 214) 6

9 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH INVESTMENT LANDSCAPE FOREIGN DIRECT INVESTMENTS (FDI) IN INDIA Total FDI inflows in India recorded a growth of 52% in H1 214 compared to the same period last year and were recorded at INR 99 bn (USD 1.5 bn) between January and June 214, based on data released by the Department of Industrial Policy and Promotion (DIPP). The Construction Development sector retained its second position behind the services sector, with an 11% contribution to the cumulative FDI inflows since 2. Contribution of the construction development sector in FDI inflows for H1 214 also improved to 4.% from 3.8% on a yearon-year basis. Cross border investments in real estate reached their highest level in 214 compared to the last four years, with over 85% contribution to overall investment activity. High levels of cross border investments were primarily due to attractive valuations of assets, which presented a significant upside potential. However, institutional investments in the real estate sector, which had peaked in 211, steadily declined over the past few years. Share of investments made by private players also reduced to 8% in 214 compared to levels in previous years. INVESTMENT ACTIVITY 17% 25% 58% 32% 45% 14% 9% User/Other Private Public Listed/REITs Cross-Border Institutional Source: Real Capital Analytics 5% 55% 8% 32% 18% 49% 85% 11% 23% 8% 7% YTD* With the Indian GDP expected to grow at a faster rate (after two years of sub 5% growth) and its allied positive linkages, PE funds have been able to raise hefty corpuses for investment in Indian real estate, a definite signal of confidence of reputed global investors. * January - September DEFINITIONS (TYPE OF INVESTMENTS) Institutional: Institutional refers to an investor, such as a bank, insurance company, retirement fund, hedge fund or mutual fund, which is financially sophisticated and makes large investments, often held in very large portfolios of investments. Cross Border: A transaction is defined as "cross-border" if the buyer or major capital partner is not headquartered in the same country where the property is located. Public Listed/REITs: companies and/or funds traded in open public markets, whose business is primarily geared toward investing in, operating or developing commercial real estate, including REITs, REOCs (Publicly traded development/property Management/ Non-REIT property Owner/ Operator) and publically-listed funds. Private: Refers to companies whose control is in private hands and whose business is primarily geared towards operating, developing, or investing in commercial real estate. User/Other: Users of commercial property for specific purposes; business users, government, educational or religious institutions who own real estate for their own use. FDI IN CONSTRUCTION DEVELOPMENT The total FDI in the Construction and Development sector was recorded at INR 36. bn (USD 594 mn) in H1 214, a 58% increase from the same period in 213. Although investments in the Construction and Development sector have declined FDI Inflows (INR Billion) FDI INFLOWS 2,5 2, 1,5 1, H1 214 Overall FDI (LHS) Source: Department of Industrial Policy & Promotion, Cushman & Wakefield Research FDI in Construction Development (RHS) FDI in Construction Development (INR Billion) 7

10 October 214 A Cushman & Wakefield Research Publication drastically from an average of INR 157 bn (USD 3.5 bn) in 28 and 29 to approximately INR 69 bn (USD 1.2 bn) in 212 and 213, higher interest levels from cross border investors for both residential and office assets are expected to increase FDI inflows. We expect the Construction and Development sector to attract higher levels of capital in the second half of the year and exceed 213 levels. PE FUND RAISING On the back of rapid GDP growth during 26 to 28 and high demand for real estate, fund raising by PE investors and developers was extremely high. Fund raising in the real estate sector had peaked in 26, with fund flows touching approximately INR 16 bn (USD 2.3 bn). But then it declined gradually until 29 with no new funds raised in 21. From 212 onwards, property valuations have become increasingly attractive. Given the stable yields and the current positive outlook of the economy, fund raising in the real estate sector has significantly improved since 212; in both 213 and 214. Foreign investors have shown a high interest in the Indian real estate sector, registering a 79% and 65% share respectively in the overall capital raised in both years. Close to INR 149 bn (USD 2.5 bn) has been raised in the first three quarters of 214 and has already exceeded 213 levels (INR 77 bn / USD 1.3 bn). A number of sovereign and pension funds have committed funds to Indian real estate such as All Pensions Group (APG Group), Abu Dhabi Investment Authority (ADIA), Qatar Investment Authority (QIA), Canada Pension Plan Investment Board (CPPIB), State General Reserve Fund of Oman (SGRF), Government of Singapore Investment Corporation (GIC), etc. through fund managers such as Piramal Fund Managers (IndiaREIT), Xander Advisors, Kotak Realty Fund, JP Morgan, ASK Advisors and even through direct agreements with local developers to invest in projects. Although such a partnership entails higher risk due to limited diversification and higher commitment of funds, the potential for return increases manifold. This is a clear indication that foreign funds now have higher confidence in the Indian market. PE INVESTMENTS IN REAL ESTATE SECTOR (PERE) Post the global economic slowdown in 28, the RBI had discouraged banks from providing capital to the real estate sector. This led to an increase in cost of capital for developers borrowing from other lending sources, which was quite high and availability for which was limited. To meet capital requirements, developers are increasingly partnering with PE funds. This year alone PE funds have invested close to INR 89. bn (USD 1.5 bn) in the real estate sector until September 214; more than double the amount invested during the corresponding period in 213 (INR 42.7 bn/usd.7 bn) and have also surpassed the total investment levels for 213 by 21%. This substantial increase in investments has been predominantly in under construction residential projects followed by acquisitions of leased office assets. The total number of deals also increased to 46 in the first three quarters of 214 compared to 4 in the whole of 213. Though investment activity was vibrant in the first two quarters of 214, it gained further momentum in the third quarter. Investments worth INR 49. bn (USD.8 bn) were committed during the third quarter. While domestic funds contributed majorly (57%) to the overall investments in 213, foreign funds dominated in the first three quarters of 214 with a 69% share in overall PE investments. INR Billion FUNDS RAISED BY PRIVATE EQUITY FIRMS IN REAL ESTATE SECTOR YTD* Domestic Offshore Transaction Size (INR Billion) ANNOUNCED PERE INVESTMENTS YTD* Domestic (LHS) Foreign (LHS) Number of Deals (RHS) Number of Deals 8

11 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH PERE INVESTMENTS - BY CITY Delhi-NCR, Mumbai and Chennai witnessed increased investments from PE funds during the first three quarters of 214, with an increase in both transaction volume and number of deals from the corresponding period last year. Investment levels in Bengaluru remained stable while they declined in Pune. Number of Deals ANNOUNCED PERE DEALS - BY CITY YTD* Mumbai Delhi-NCR Bengaluru Pune Chennai Others Approximately 41% (INR 36.7 bn/usd.6 bn) of the total investments during the first three quarters of 214 was noted in Delhi-NCR, primarily in leased office assets, which is an increase of close to 6 times compared to the first three quarters of 213. Delhi-NCR overtook Bengaluru and Mumbai; cities that traditionally attracted maximum investments in the country. However, both Mumbai and Bengaluru witnessed an increase in investments from last year. Overall, the deal volume in Mumbai Transaction Size (NR Billion) PERE TRANSACTION SIZE - BY CITY YTD* Mumbai Delhi-NCR Bengaluru Pune Chennai Others for the first three quarters of 214 registered at INR 24. bn (USD.4 bn), more than 5 times the investments made during the corresponding period last year. Bengaluru, recorded a marginal growth of 4% from the same period last year with investments of INR 2.6 bn (USD.34 bn). Investments in Bengaluru were primarily made in the leased office assets (56%) while those in Mumbai were largely in residential assets (7%). Pune was the only city, which witnessed a decline in PE transactions levels from last year; investment volume for the first three quarters of 214 was recorded at INR 2.2 bn (USD 37 mn), a 72% decline from the previous year. PE investments in Chennai for the first three quarters increased by over ten times the previous year and stood at INR 2.7 bn (USD 45 mn), all of which were invested in the residential assets. PERE INVESTMENTS - BY ASSET CLASS Until September 214, the commercial office sector attracted highest PE investments, which stood at INR 44.2 bn (USD.73 bn), close to double of last year's total figures. The sector contributed close to 5% of the overall investment volume recorded in 214, all of which were made in leased office assets. The number of transactions in office assets also increased to 7 from 3 last year. Number of Deals ANNOUNCED PERE DEALS - BY ASSET CLASS YTD* Mixed Use Residential Office Retail Hospitality Others The residential sector witnessed investments of close to INR 41.8 bn (USD.69 bn) during the first three quarters of 214, more than double of the corresponding period last year. The number of transactions in the residential asset sector more than doubled to 38 during the period, with average transaction size remaining stable at around INR 1.1 bn (USD 18 mn). The retail sector witnessed only one transaction with an investment of INR 3 bn (USD 5 mn) in Bengaluru. The investor interest in the 9

12 October 214 A Cushman & Wakefield Research Publication hospitality sector remained low with no investments in the segment recorded till September 214. CORPORATE TRANSACTIONS - BY ASSET CLASS PERE TRANSACTION SIZE - BY ASSET CLASS INR Billion Number of Deals INR Billion Commercial Residential Mixed Use Hospitality Transaction Size (LHS) Number of Deals (RHS) YTD*, Real Capital Analytics Mixed Use Residential Office Retail Hospitality Others CORPORATE TRANSACTIONS IN REAL ESTATE Based on data from Real Capital Analytics, total corporate transactions in the real estate sector during the first three quarters of 214 were estimated at INR 18.8 bn (USD 1.8 bn); this was more than double the figure recorded during the same period last year (INR 45.2 bn/usd.76 bn). The increase was primarily due to private companies building up their real estate portfolio. investments during the first three quarters of 214 at approximately INR 44.5 bn (USD.74 bn). Investment levels also improved in Delhi-NCR by approximately 62% and were registered at INR 24.3 bn (USD.4 bn) in commercial offices (58%) and residential assets (42%). Chennai witnessed investment volume of INR 1. bn (USD 166 mn), the highest in South India, surpassing Hyderabad and Bengaluru. Bengaluru recorded investments of INR 5.9 bn (USD 98 mn) and Hyderabad recorded investments of INR 8.4 bn (USD 14 mn). CORPORATE TRANSACTIONS - BY ASSET CLASS CORPORATE TRANSACTIONS - BY ASSET CLASS With large investments in the residential development site assets, especially in Mumbai, the residential asset class (INR 75.3 bn/usd 1.3 bn) recorded the highest share (69%) in total corporate transactions, followed by the office sector with INR 27.2 bn (USD.45 bn) worth of transactions during the first three quarters of 214. Investment levels also doubled in the hospitality sector with INR 4.3 bn (USD 71 mn) invested in 214 so far. CORPORATE TRANSACTION - BY CITY With large residential development site transactions in suburban and peripheral locations, Mumbai attracted the highest level of INR Billion Mumbai Delhi- NCR Transaction Size (LHS) Bengaluru Pune Chennai Others Number of Deals (RHS), Real Capital Analytics Number of Deals 1

13 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH RECENT PERE DEALS DEVELOPER/OWNER ACQUIRER PRODUCT MIX CITY VALUE (INR MN) Unitech Corporate Parks Brookfield Asset Management Leased Office Delhi-NCR, Kolkata 2,5 Tata Realty and Infrastructure Ltd Xander Group Leased Office Mumbai 6,5 Leela Palace Carnival Group Leased Office Kochi 2,8 Kapstone Constructions (Rustomjee Developers) Xander Group Residential Mumbai 3,7 Peninsula Brookfield Ansal Properties Residential Delhi-NCR 3, Ozone Group Blackstone Group Residential Chennai 1,75 SELECT CORPORATE TRANSACTIONS DEVELOPER/OWNER ACQUIRER PRODUCT MIX CITY VALUE (INR MN) Uttar Pradesh Industrial Development Authority Infosys Office Delhi-NCR 13,54 Tata Steel Oberoi Group Residential Mumbai 11,55 Clariant Chemicals Lodha Group Residential Mumbai 11,54 New Great Eastern Mills & Mahindra Lifespaces Peninsula Land Limited Residential Mumbai 6,5 Unitech Group Gulshan Homz Residential Delhi-NCR 4, DivyaSree Developers Cognizant Office Hyderabad 1,12 OUTLOOK The new government has given special importance to the real estate sector with a number of policy announcements. The government has also relaxed norms for FDI and introduced REITs and InvITs, all of which are expected to result in higher capital inflows. We expect overall private equity investments to exceed INR 12 bn (USD 2. bn) by the end of

14 October 214 A Cushman & Wakefield Research Publication DEMAND - SUPPLY GAP ANALYSIS RESIDENTIAL SECTOR With around 122, units being launched in the top eight Indian cities during Q1 and Q3 214, the residential real estate sector in India has been more or less stable despite the subdued economic conditions confronting the sector for past few years. Bengaluru, Mumbai and Delhi-NCR remain the hotspots and accounted for around 6% of unit launches in 214. As of Q3 214, capital values appreciated 5-13% in Bengaluru and 3-8% in Mumbai compared to the same period last year. As Bengaluru is largely end-user driven and Mumbai has a fair mix of end-users and investors, capital values have improved from the last year. However, capital values in Delhi-NCR declined 2-11%, primarily due to significant unsold inventory. Chennai, Kolkata and Pune accounted for additional 33% of unit launches in 214. As of Q3 214, capital values recorded marginal appreciation, 4-1% in Chennai, 1-5% in Kolkata and 2-15% in Pune, compared to the same period last year. A notable trend in 214 was that the developers focussed primarily on mid segment offerings considering that this category has been largely underserved since the past few years. Around 68% units launched in first three quarters of 214 were in the mid segment, registering a significant increase from 56% during the same period of 213. The residential sector has been largely subdued across cities as high levels of unsold inventory exist, launches of new projects have been postponed amidst sluggish demand and capital values have largely been stable. High-end segment's capital values in select areas of Delhi-NCR, Mumbai, Ahmedabad and Hyderabad recorded declines of up to 14% over the year (from Q2 213 to Q2 214) due to low sales volumes and high inventory levels. Meanwhile select mid segment locations in Bengaluru, Kolkata and Pune witnessed appreciation up to 24% during the past year due to sustained demand. Future Demand-Supply Analysis Cushman & Wakefield Research estimates that overall urban housing demand in India is expected to be nearly 13 mn units by the end of 218. Besides the natural growth in population and declining household sizes leading to an increase in the demand for housing, increasing urbanization catalysed by migration of rural population to cities, development of industrial clusters and the proposed development of smart cities are likely to play a pivotal role in generating this additional demand. The top eight cities of India are likely to constitute approximately 23% of the demand, amounting to 2.95 mn housing units by the end of 218. These cities will continue to act as nerve-centres of growth in the coming years due to their strong economic base and existing infrastructure. The growth of India's middle class population along with an increase in income, improvement in access to mortgage funding, attractive payment schemes offered by a few developers and good returns from the asset class have led to an increase in the growth of investments from this group. The Middle Income Group 1 (MIG) is expected to generate the highest demand of 1.8 mn units across the top eight cities till 218, followed by Lower 2 Income Group (LIG) which is expected to generate demand of 3 nearly 1.5 mn units, and the Higher Income Group (HIG) will generate a demand for.52 mn units. Thus, both LIG and MIG will account for nearly four-fifths of the total demand in these eight cities. DEMAND-SUPPLY ANALYSIS BASED ON INCOME GROUP ( ) 2% 19% 2% 23% 41% 59% 21% 58% 4% LIG MIG HIG Demand Supply Gap Delhi-NCR is expected to witness maximum cumulative demand of nearly 818,6 housing units by the end of 218, followed by Bengaluru with a demand of 438,7 units. Kolkata and Pune will record the lowest and second lowest demand for approximately 97,2 and 191,2 units respectively during the same period. 1 MIG Households earning INR 15,1 to INR 1mn per annum 2 LIG Households earning up to INR 15, per annum and above poverty line 3 HIG Households earning above INR 1mn per annum 12

15 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH The existing under construction and planned pipeline is for 1.31 mn units, expected to be delivered across the top eight cities by the end of 218. Some of these units have already been sold to buyers and investors. Past trends suggest that at least 1. million units will be launched by 218 end. Hence, there will be still be a huge shortfall to tackle the expected new demand that will be generated by 218. This does not take in to consideration the total housing shortage of mn units estimated by the Ministry of Housing and Urban Poverty Alleviation (MHUPA), India in 212, which has still not been tackled by either the government or private developers. Developers have been refraining from venturing into affordable housing construction due to issues such as high land cost, lack of availability of funding at competitive rates, longer construction timelines, change in location demand and capital values, limited FSI, etc. These factors contribute in making affordable housing a not-so-profitable business proposition for developers. The expected supply for this segment is just 21% of the total supply across top eight cities till 218. Thus, nearly 58% of the cumulative demand-supply gap across the top eight cities is contributed by LIG. With respect to the cities, Delhi-NCR, Kolkata, Mumbai and Pune are expected to witness the highest shortfall in LIG units. Despite accounting for nearly 59% of the total anticipated supply, MIG will record a share of nearly 23% in the total estimated gap across the top eight cities in India by 218-end. Cities such as CONTRIBUTION TO TOTAL DEMAND: CITY WISE ( ) 1% 9% 8% 7% 6% 5% 4% 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% CONTRIBUTION TO TOTAL SUPPLY: CITY WISE ( ) % Ahmedabad Bengaluru Chennai Ahmedabad, Bengaluru, Mumbai and Delhi-NCR are expected to lead the ranks of those with the highest shortfall of housing units catering to MIG. Even though the HIG segment is expected to witness an oversupply scenario in certain cities such as Mumbai and Kolkata, it will record a share of nearly 2% of the total gap across the top eight cities. Bengaluru, Chennai and Delhi-NCR are the leaders in cities with the highest demand-supply gap for HIG units. Impact On Real Estate Hyderabad According to estimates by Cushman & Wakefield Research, at the current pace of construction activity, the demand-supply gap is expected to narrow in 215 and then increase steadily in subsequent years. However, due to extension of construction Kolkata YEAR WISE DEMAND - SUPPLY GAP Mumbai Delhi -NCR Pune 3% 2% 1% % X.7X X 2.1X 2.2X Ahmedabad Bengaluru Chennai Hyderabad Kolkata Mumbai Delhi -NCR Pune Note: The size of the circle represents the gap for the year taking 214 as the base 13

16 October 214 A Cushman & Wakefield Research Publication timelines or any delay in obtaining the regulatory approvals of projects scheduled to be delivered in 215, the gap in 215 might widen due to spill over of project completions to later dates. A high spill over of supply from 215 to later years might steadily increase the gap across the top eight cities from 214 as the supply is expected to fall significantly short of the demand each year. CITY WISE CONTRIBUTION TO OVERALL GAP Delhi-NCR Pune Mumbai 25% 2% 1% 5% % Ahmedabad 15% Kolkata Bengaluru Chennai Hyderabad In the current scenario, there is a disparity between the consumers' expectations and the segmentation of projects launched by developers. For instance, in Mumbai, the cumulative HIG supply is expected to exceed demand significantly. Consequently, due to excess supply in one segment, the overall gap has reduced, but a large portion of MIG and LIG demand will still remain unaddressed. Similarly in Kolkata, the LIG demand is significantly high, but majority of the supply is in MIG and HIG segment. Thus, this mismatch in demand-supply leads to sluggish sales and inventory pile-up in the market despite existing shortfall. However, these initiatives are not enough to counter the existing challenges faced by the sector. India's housing shortage is dominated by households belonging to the Economically Weaker Sections (EWS) and LIG, which together contributed to 95% of the urban housing shortage in 212 as per MHUPA estimates. To increase the attractiveness of EWS and LIG housing, some specific measures such as allocating suitable land to developers, developing organized rental housing, providing access to funds at lower rates for building low cost affordable housing projects, reducing duty on import of technology and machinery aiding affordable construction, developing schemes using local sourcing of materials, encouraging micro finance schemes to enable EWS and LIG population to access loans, etc. need to pursued vigorously. Further, the long gestation periods in residential projects being started and completed due to delays in approvals expose developers to multi-fold risks due to change in market conditions. To prevent this and ensure timely completions, single window clearance mechanism should be implemented and processes should be automated to reduce time. Increasing FSI limits supported by adequate infrastructural development to promote better usage of scare and expensive land and promoting land pooling schemes are measures that can help address land scarcity and reduce housing shortage. The Way Forward The NDA Government has initiated a target of 'Housing for All by 222' and introduced some policy measures mentioned earlier. These policy measures seek to invigorate the affordable housing sector by attracting FDI and domestic capital in large volumes. The government is following a twin pronged strategy of boosting demand whilst also removing supply-side bottlenecks. An approach to boost urbanisation through smart cities and development of large industrial corridors will help to develop new residential locations and tackle some of the most important issues facing the existing cities in India. 14

17 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH COMMERCIAL OFFICE SECTOR The commercial office sector witnessed about 2.4 million square feet (msf) of Grade A supply across the top eight cities during January-September 214, an increase of 9.% over the corresponding period a year ago. The increase was mainly owing to a substantial increase (almost 6 times) in Grade A supply in Hyderabad as many deferred projects got completed during the period. This was followed by a 1.7 times increase of Grade A supply in Delhi-NCR. On the flip side, supply in Chennai, Kolkata and Pune declined between 6-8% due to construction delays and deferments. PAN INDIA GRADE A STOCK Area (million sf) CITY WISE SHARE IN SUPPLY (GRADE A) Pune Kolkata Chennai Ahmedabad Hyderabad Mumbai Bengaluru Bengaluru Delhi- NCR Mumbai Chennai Pune Hyderabad Kolkata Ahmedabad 14.7% 7.2% 15.1% 4.2% 15.8% 2.9% 2.9% Delhi-NCR 19.1% YTD* 214 YTD* 5.% 2.8% 1.8% 6.1% 14.2% 16.% 24.8% 29.3% The total Grade A office stock across the top eight cities was noted at 368. msf as on Q3 214; prominent cities such as Bengaluru, Delhi-NCR and Mumbai accounted for almost 65% of 213 YTD* 214 YTD* 1.6% 7.3 Top 3 contributors this stock. At 94.5 msf, Bengaluru recorded the highest Grade A stock amongst the top eight cities, followed by Delhi-NCR at 79.3 msf and Mumbai at 66. msf. Owing to improved occupiers' sentiment, demand for office space picked up in most cities during January-September 214 and net absorption was recorded at 21.4 msf, a y-o-y increase of 34%. Significant increases were recorded in Ahmedabad, Bengaluru and Hyderabad; in each of these markets, net absorption more than doubled over YTD 213 on the back of substantial pre-committed absorption. Delhi-NCR also added to the overall increase with a 52% increase in net absorption over YTD 213. Kolkata and Pune were the laggards as these markets witnessed a decline in net absorption, which varied between 28-36%, offsetting some of the increase witnessed in other cities. SHARE IN NET ABSORPTION (GRADE A) Kolkata Ahmedabad Pune Chennai Mumbai Hyderabad Delhi-NCR Bengaluru 6.7% 13.1% 2.5% 29.7% 4.2% 2.1% 4.6% 2.3% 15.2% 7.2 % 12.3% 8.5% 21.2% 14.5% 17.8% 2.2 % 213 YTD* 214 YTD* Top 3 contributors Bengaluru accounted for almost one-third (3%) of the total Grade A net absorption, followed by Delhi-NCR and Mumbai with 2% and 15% shares respectively. The Information Technology and Business Process Management (IT-BPM) and Banking, Financial Services and Insurance (BFSI) sectors continued to be the most dominant demand drivers with 62% and 11% shares respectively in the total Grade A absorption. The share of the IT-BPM sector in the total absorption increased to 62% from 53% during YTD 213 as occupiers expanded their operations on the back of improved sentiments in developed economies such as the US and EU nations (these countries typically account for 8% of India's IT-BPM sector's export revenues). During YTD 214, fresh pre-commitments increased y-o-y by 35% (6.5 msf), reflecting improved sentiments amongst corporate 15

18 October 214 A Cushman & Wakefield Research Publication occupiers. Bengaluru accounted for significant 65% share as it witnessed about 4.2 msf of pre-commitments from IT-BPM and consulting firms. SECTORAL ABSORPTION (GRADE A) Others Energy & Chemicals Healthcare & Pharmaceuticals Engineering. & Manufacturing Telecom Consulting BFSI IT-ITES 11.2% 15.% 3.7% 3.% 14.2% 3.6% 7.3% 11.8% 45.3% 2.6%.22% 4.1% 2.% 3.3% 1.7% 62.1% 213 YTD* 214 YTD* Overall Grade A vacancy level in the top eight cities was noted at 21.8% at the end of Q3 214, a marginal drop of.6 percentage points over Q This is due to narrowing supply-net absorption gap as net absorption increased by 33% whereas supply increased by 9% during the period. Mixed trends were observed in city level Grade A vacancies. Chennai reported a y- o-y fall of 5.6 percentage points in its vacancy rate as net absorption outpaced supply in YTD 214. Similarly, vacancy levels in Bengaluru, Delhi-NCR, Mumbai and Pune dropped by about 2. percentage points each in YTD 214. However, vacancy levels in Ahmedabad and Hyderabad increased by about 5.6 and 2.4 percentage points as supply continued to outstrip demand in these markets. 3% each compared to the same period last year. This can be attributed to a host of reasons such as rental correction in select micro-markets, high vacancy levels in a few micro-markets putting pressure on rentals and occupiers relocating to better quality Grade A spaces with lower rentals in select sub-markets, thereby affecting the weighted average rentals. Delhi-NCR, Hyderabad and Pune witnessed weighted average rents strengthen by 6-8% over Q This is due to fresh supply of Grade A buildings at premium rates and an increase in rents in few existing projects, which have high occupancies. RENTAL VALUES TREND Ahmedabad, Bengaluru, Kolkata, Mumbai Future Demand-Supply Analysis Chennai, Delhi- NCR, Hyderabad and Pune The total Grade A office stock is expected to breach the 5. msf mark by 218 across the top 8 cities, with nearly msf of Grade A office supply anticipated over the next five years (214-18). Bengaluru is expected to be the first city in India to have over 1. msf of Grade A stock by 215. In the medium term ( ), the pan-india supply is likely to be 43% higher than 213 as projects that were deferred earlier are expected to be completed. As a result, 215 will see the highest total Grade A supply (45.5 msf) in next five years. VACANCY RATES TREND SUPPLY FORECAST - GRADE A (214-18) Bengaluru, Chennai, Mumbai, Delhi- NCR and Pune Ahmedabad, Hyderabad and Kolkata Area (million sf) The weighted average rentals for Grade A developments in Q3 214 exhibited a mixed trend. Three of the top 8 cities - Bengaluru, Kolkata and Mumbai witnessed a decline in rentals by * January - September 214 (F) 215 (F) 216 (F) 217 (F) 218 (F) 16

19 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH Bengaluru is expected to have the highest share (32%) in the overall Grade A supply over the next five years, closely followed by Delhi-NCR and Mumbai with around 21% and 14% shares. Hyderabad is expected to contribute a 1% share in the upcoming supply during the period (214-18) as the projects that were deferred due to political instability in the State and subdued demand will get now be completed. Kolkata is likely to witness supply influx of 4. msf each in 215 and 216 compared to its historical average of 1.5 msf as a couple of large projects are expected to be delivered. This may further increase the existing vacancy level of 34% in Q3 214 as demand is not likely to keep pace with supply. Area (million sf) CITY WISE SUPPLY FORECAST - GRADE A (214-18) higher than the average of 26.7 msf over the past five years (29-13). Revival in the domestic economy coupled with improved sentiments in developed economies such as US and EU nations is expected to lead to higher demand for office space over the next five years (214-18). Also, recent estimates for the annual average net absorption are about 25% higher than the projections made last year for the same period, owing to improved fundamentals of the economy and its allied growth prospects. Bengaluru is expected to be the highest contributor in overall Grade A net absorption (primarily led by IT-BPM and Consulting sectors) with a significant share of 29% in the total cumulative net absorption during Delhi-NCR and Mumbai are expected to contribute 18% and 17% (to the net absorption) respectively. Hyderabad and Pune are likely to have around an 11% and 1% share respectively followed by Chennai with a 6% share. Ahmedabad and Kolkata are anticipated to contribute about 4% and 3% shares respectively in the total Grade A net absorption. NET ABSORPTION FORECAST - GRADE A (214-18) 5 Ahmedabad Bengaluru Chennai Delhi-NCR The top eight cities are expected to witness around msf of Grade A net absorption over the next five years (214-18), amounting to an average of 38.9 msf of annual net absorption, Hyderabad Kolkata Mumbai Pune Area (million sf) CITY WISE NET ABSORPTION - GRADE A (214-18) 214 (F) 215 (F) 216 (F) 217 (F) 218 (F) 7 Area (million sf) Ahmedabad Bengaluru Chennai Delhi-NCR Hyderabad Kolkata Mumbai Pune The weighted average rents for Grade A developments across most cities are anticipated to undergo an average annual appreciation of about 3-4% in the next five years. Mumbai is expected to witness rental appreciation in double digits (average 12%) in 215 and 216, (highest among the eight cities) in the next five years; much of this appreciation can be attributed to the quality upcoming supply in the submarket of BKC (Bandra-Kurla Complex) as this area is one of the most expensive office destinations in Mumbai. 17

20 October 214 A Cushman & Wakefield Research Publication INR/sf/month WEIGHTED AVERAGE RENTS - GRADE A (F) 215 (F) 216 (F) 217 (F) 218 (F) Ahmedabad Bengaluru Delhi-NCR Chennai Hyderabad Kolkata Mumbai Pune Delhi-NCR is the only city, which is forecasted to witness an average annual rental decline of 1-3% during the period, 215 to 218. This is primarily due to new supply that is expected in the peripheral submarkets of Gurgaon and Noida; these areas command comparatively lower rents and have higher vacancies than the CBD and SBD locations, hence they will influence weighted average rents adversely. Impact On Real Estate In the medium term (by 215 end), vacancy levels are expected to inch up due to significant addition of Grade A office space in select cities. Hence, select micro-markets may face downward pressure on rentals. This may favor tenants as they will be able to negotiate with landlords and get better deals, leading to savings in real estate costs. However, beyond 215, the supply-demand gap is likely to decrease as occupier sentiment is expected to revive significantly, on the back of improved global and national economic conditions. As the Indian economy returns to its higher growth trajectory of close to 8% and above, multinational companies are expected to increase investments; we expect an improvement in demand from specific sectors such as BFSI, Consulting, manufacturing and energy sectors. Also, the improvement of growth prospects in developed economies would further augment demand for office space from the IT-BPM sector, the biggest demand driver for commercial real estate. This increase in demand coupled with the advent of a number of REITs from next year will help developers improve cash flows, which in turn will have a positive bearing on the commercial office sector. Area (million sf) SUPPLY, NET ABSORPTION AND VACANCY TREND - GRADE A (F) 215 (F) 216 (F) 217 (F) 218 (F) Supply (LHS) Net Absorption (LHS) Vacancy (RHS) 25% 2% 15% 1% 5% % Percentage 18

21 INDIAN REAL ESTATE: POISED FOR HIGHER GROWTH RETAIL SECTOR As per estimates, organized retail constitutes 7% of the total retail sector in India and is expected to attain 1.2% share by The allowance of 51% FDI in multi-brand retail in 212 met with varying degrees of successes as some states viewed it cautiously, while others such as Haryana, Maharashtra and Uttarakhand endorsed it wholeheartedly. Growing acceptance of online shopping portals has resulted in domestic and international e-commerce giants increasing their investments in India. This will also create a new growth area for retail in India. As per Cushman & Wakefield Research, the size of the overall retail market in India is set to reach USD 1,146 bn (INR 68,774 bn) by Although organized retail forms a small percentage of the total retail market, favorable demographic factors such as a young population, brand conscious middle class and growing per capita income levels will drive retail consumption in India. Future Supply According to Cushman & Wakefield Research, 7 msf mall space is currently operational across the top eight Indian cities. The fact that the current mall stock across these cities has doubled since 28 is indicative of the growth in organized retail formats in the country, which can be attributed to growing consumerism in the country. An additional 21 msf is under construction and is expected to become operational by 217. Due to the cosmopolitan culture and well-developed peripheral locations, Delhi-NCR and Bengaluru account for 46% and 21% of this upcoming supply respectively. Despite being the financial capital and a prime cosmopolitan city in West India, Mumbai is going to witness only 5% of the total upcoming supply owing to shortage of suitable land parcels. In the first three quarters of 214, five cities Bengaluru, Delhi- NCR, Hyderabad, Kolkata and Pune witnessed total mall supply of 1.53 msf. As per Cushman & Wakefield Research estimates, in the last one year (July 213-July 214), 14.9 msf of upcoming mall space was deferred due to reasons such as financial crunch, construction delays and poor response from investors and retailers. Malls Deferred (Number) DEFERRED MALL SUPPLY IN LAST ONE YEAR Ahmedabad Bengaluru Chennai Delhi -NCR Number of Malls Deferred (LHS) Hyderabad Kolkata Mumbai Pune Deferred inventory (RHS) Low supply and moderate demand have led to a marginal decrease in overall mall vacancy levels, which was noted at 14.5% in Q Both Mumbai and Delhi-NCR registered vacancy Million sf TOTAL UNDER CONSTRUCTION MALL SUPPLY MALL INVENTORY & VACANCY LEVELS 25 35% 11% 5% 6% 6% 21% 5% Million sf % 25% 2% 15% 1% 5% Vacancy (%) 46% Ahmedabad Bengaluru Chennai Delhi-NCR Hyderabad Kolkata Mumbai Pune Ahmedabad Bengaluru Chennai Delhi -NCR Mall Inventory (LHS) Hyderabad Kolkata Mumbai Vacancy (RHS) Pune % 19

22 October 214 A Cushman & Wakefield Research Publication levels of nearly 15% whereas Bengaluru, Hyderabad and Chennai maintained low vacancy levels of 5-8%. At 3% and 25% respectively, vacancy levels are currently high in both Ahmedabad and Pune as retailers are keen on only quality mall spaces or main streets in these cities. At 4%, Kolkata currently has the lowest vacancy levels in the country. (Gurgaon), Greater Kailash-I (M Block) in Delhi-NCR, Park Street in Kolkata and Linking Road, Colaba Causeway in Mumbai are the most expensive main street locations currently in India. Rental Trend Mall rentals have been largely stable across most micromarkets in the top eight cities for most of 214. However, Hadapsar in Pune was the only micromarket to witness upwards rental movements in all three quarters this year as retailers are increasingly occupying the vacant spaces in malls in the location. Select micromarkets in cities such as Bengaluru, Chennai and Mumbai recorded some mixed rental trends during select quarters this year due to a variety of reasons. These ranged from strong demand for malls resulting in an upward rental trend to reasons such as adverse impact of infrastructural work in the vicinity affecting footfalls, poor location, etc resulting in declining rentals. Mall micromarkets such as Elgin Road and Park Circus in Kolkata, Lower Parel in Mumbai and South Delhi in Delhi-NCR are the most expensive locations currently. Similarly, main street rentals were also largely stable in 214 across all cities. Again, Pune's established main street locations of Aundh and FC Road were the only ones to record an upward rental trend across all quarters this year. Khan Market, Connaught Place (Inner Circle), South Extension I & II, DLF Galleria MODE OF ENTRY BY INTERNATIONAL BRANDS IN INDIA BRAND NAME SEGMENT STATUS IN INDIA ENTRY ROUTE IN INDIA INDIAN PARTNER OWNERSHIP STATUS Starbucks Coffee Company Food & Beverages Present Joint Venture Tata Global Beverages 5:5 Domino's Pizza Food & Beverages Present Franchisee Jubilant Foodworks Ltd. - Dunkin' Donuts Food & Beverages Present Franchisee Jubilant Foodworks Ltd. - Marks & Spencer Apparels Present Joint Venture Reliance Retail - Tommy Hilfiger Apparels Present Joint Venture Arvind Ltd. - Hennes & Mauritz AB Apparels Planning Single-Brand Retail NA 1% Gap Inc. Apparels Planning Franchisee Arvind Ltd. - IKEA Home and Office Furnishings Planning Single-Brand Retail NA 1% International retailers have been making a foray in India through various modes such as joint ventures or partnerships through franchisees, though now the preference for entry is also tilting in favor of 1% FDI for ownership of their operations as has been witnessed in some recent cases such as IKEA and Hennes & Mauritz AB. Some other international brands such as Burger King and Uniqlo are also exploring various entry strategies. 2