Indian real estate. Decoding institutional investments. KPMG.com/in

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1 a Indian real estate Decoding institutional investments September 2017 KPMG.com/in

2 b Indian real estate - Decoding institutional investments Indian real estate Decoding institutional investments

3 c Foreword KPMG in India With an investment of over USD10 billion, over the last two years, which is more than half of the total investments witnessed since 2013, the Indian real estate sector is witnessing a strong inflow of funds from private institutional investors. Several significant investments in recent past have put India on global real estate investment radar, as evident from billion dollar plus deals witnessed in the office space segment over the last 20 months. Additionally, the rising deal size has more than doubled the average deal size to USD111 million in Sovereign Wealth Funds and Pension Funds from Canada, Singapore, Netherlands, and Qatar are becoming more active with over USD3 billion investments in 2017 in India s real estate. However, they have focussed primarily on leased commercials assets such as office, retail and warehouses. Private Equity funds and Non-Banking Financial Companies (NBFC) continue to remain the largest investor in Indian real estate, accounting for about two-third of the total investments since These institutional investors continue to maintain their edge over banks as a preferred source of debt capital for construction purposes. This is amidst declining credit from banks to the commercial real estate, owing to rising Non-Performing Assets (NPAs) and higher risk provisioning. Investors have started to move towards sub-urban regions and smaller cities. Over 40 per cent of the total investments since 2016 have been made in non-metro cities such as Pune, Greater Noida, Chandigarh, and Amritsar to name a few. The shift could be due to mid-term saturation in the large cities resulting from high property prices and fewer launches. India s strong economic fundamentals coupled with the introduction of several growth oriented reforms including Real Estate (Regulation and Development) Act, 2016; Real Estate Investment Trusts; Goods and Service Tax; relaxation of Foreign Direct Investment (FDI) norms etc. are aiding the real estate sector to attract higher investments. India s office market has been exhibiting healthy trends with about 35 to 40 million sq ft of absorption/space occupied on an annual basis across key 14 key cities in India. New completions on the other hand recorded million sq ft annually during However, it dropped to about 34 million sq ft in The total absorption has outpaced the total supply for two consecutive years (2015 and 2016), driving down the vacancy rates to a level of 19 per cent, from about 22 per cent in The residential market appears to settle post series of reforms including demonetisation, GST and RERA. High level of unsold inventory is expected to keep new launches under check and drive developers to focus on offloading existing inventory. With the rapidly growing trend of coworking or shared office spaces, CRE models are fast picking-up, as they not only address the booming and volatile commercial real estate requirements of India s IT BPM, but also start-ups and small and medium enterprises sectors. On the affordable housing front, the government has taken some significant steps to drive private investments in order to achieve its vision of developing 20 million houses by The background paper attempts to decode the institutional investment trends in the real estate sector and I hope you find the paper insightful and meaningful. Neeraj Bansal Partner and Head ASEAN Corridor, Building, Construction and Real Estate, KPMG in India

4 d Indian real estate - Decoding institutional investments Foreword Indian real estate NAREDCO It gives me great pleasure to present to you, KPMG in India s background paper on key investment trends in the Indian real estate sector, launched at the REIIS Summit by National Real Estate Development Council (NAREDCO) in association with APREA on 21 September in Mumbai. The report unveils progressive scope of Indian real estate in terms of productive investment, the quantum and expected trends. Government of India s ambitious initiative of Housing for All-by 2022 ; which when unfolded with necessary support in respect of tax benefits and availability of finance, ease of doing business, and rationalising taxation policies is expected to bring about a huge growth the residential segment. The Union Budget for FY accorded infrastructure Decoding status to affordable institutional housing with investments necessary tax reliefs. Given the government s commitment, implementation of reforms such as GST, RERA to reboot the country s real estate sector is helping attract the highest interest of global investors. Being the second major contributor for GDP growth, the sector is currently witnessing a surge in flow of foreign investments in commercial and retail segment. While the, commercial and retail segments are gaining traction among the investors, one is expected to witness huge growth in the emerging asset class similar to the warehousing and logistics sector. This shall be achieved with the changes brought in by GST, to remove the state barriers and help bring in huge investments in warehousing and logistics based on the demand for delivery which has substantially reduced rather than the taxation structure-based on the location of warehousing and logistics depots. Government of India s other noteworthy initiatives such as Make in India, Ease of Doing Business etc. are expected to augmnent the growth and investment in key sectors such as defence, railways, aviation. KPMG in India does a commendable job of mapping and assessing India s investment pattern. This can definitely make a difference in understanding the current process and future trends in thoughtful and pragmatic ways. Dr. Niranjan Hiranandani President NAREDCO Co-founder and Managing Director Hiranandani Group

5 e Foreword APREA India has joined one of the world s most exclusive real estate clubs. In 2017, for the first time, the market value of India s institutional investment grade assets is expected to top a trillion U.S. dollars. Only 11 other countries offer such market depth and none, except China, is likely to witness average 12 per cent growth of its real estate investment universe every year for the next decade. This growth can be attributed to growing urbanisation and mushrooming middle class, in India s key cities. India s urban population is currently rising at nearly twice the country s overall rate. More decisively, the ranks of India s middle classes more than doubled to over 600 million people since 2005 and the number of households with disposable income tripled. The middle-class wave continues to swell and India s share of global consumption is forecast to overtake China, the United States and Europe in about a decade. These factors can drive demand for the hardware and software of cities the networks of buildings and infrastructure that underpin metropolitan India, along with the myriad economic and social services (and value) they help deliver. When combined with an increasingly sophisticated, deep and liquid capital market, these factors are likely to forge one of the world s major investment asset classes. This report by KPMG in India tracks the fundamentals of India s real estate market. It also reveals the rising tide of international investor interest in India. However, sustained global interest will depend on strong economic fundamentals and clearer ground rules for doing business. In recent years, the government has played a critical role in implementing reforms that foster a more efficient, resilient and productive marketplace the REITs/ InvIT framework, PPP and urban programs, RERA, housing policy and smarter cross-border tax arrangements, to name a few. Continued reform will see India s real estate markets move into the world s league table of top five real estate investment markets within the decade. APREA will continue to work with India s policy-makers and leadership groups, such as KPMG, to transform this ambition into a reality. Peter Verwer Chief Executive Officer APREA: Asia Pacific Real Estate Association

6 f Indian real estate - Decoding institutional investments Key sector highlights- Indian real estate USD5 billion Decoding institutional investments invested by institutional investors since the beginning of 2017 a record year in the making Commercial assets such as office space, warehouses gain preference USD111 million average deal size in 2017, which is more than double the deal size witnessed in last few years USD3 billion invested by pension and Sovereign Wealth Funds (SWFs) since the beginning of 2017 PE and NBFCs become the preferred capital source for underconstruction projects

7 g Foreign investors up the game - contribute over of total 80% private institutional investments since 2016 Over 90 % deals through debt route in 2017 More than 40% investment in non-metro cities since Break up of investment is as follows (USD billion): Retail Office Warehouse Residential lakh units/+3 years of unsold inventory in 1H2017. Three cities account for 70% inventory: MMR lakh Delhi-NCR lakh Bengaluru lakh million sq ft of office space supply over the next 3 years, more than half of which is expected to come up in Delhi- NCR

8 Leader speaks h Indian real estate - Decoding institutional investments Indian real estate India is rapidly transforming and at a significant pace compared to the world. The high economic growth is supported by a thriving middle class which represents half of India s population; urbanisation; and rising infrastructure spend. Also, introduction of landmark reforms such as GST and Insolvency and` Bankruptcy code etc will make the country more transparent and sustainable in the long run. The developments are getting noticed globally and India is highly active on global investor s radar which is evident in India s growing share in global FDI recipients. Decoding institutional investments The real estate sector, is among the mainstay of the Indian economy. Being one of the largest contributor to the economy and employment it has received significant attention from the government over last few years. Key reforms and programmes introduced in recent past such as RERA, REITs, Housing for All, Smart Cities, AMRUT etc. are expected to transform the growth, transparency and governance in the sector. The year 2017 will truly be a defining year for the real estate sector and one that will lay the foundation for the next decade. Over the past few years, everyone in the funding space focussed on some form of lending or structured debt with a much smaller contingent in the market focussing on equity, albeit restricted to Tier 1 developers and metro locations. In addition, the industry also witnessed a great deal of consolidation with prices being rationalised and sales velocity being driven largely by the developers brand recognition and execution capabilities (i.e. visible progress on site). On one hand where the impact of demonetisation was severe, on the other it further accelerated the pace of consolidation in the marketplace. The developer today, in a post RERA and GST world, therefore needs a financial partner who can cater to the entire capital stack, which is much more than just a transactional relationship. The need of the hour is for capital to be fungible/flexible based on the life cycle of a development project. It is extremely attractive to a developer to be able to draw on early stage equity finance with an ability to shift to structured debt and ultimately construction finance as the project progresses. Pradeep udhas Office Managing Partner - West KPMG in India Khushru Jijina Managing Director Piramal Finance Limited All views and opinions expressed herein are those of the authors and do not necessarily represent the views of KPMG in India.

9 i India is on an interesting growth trajectory given the government s increased focus on inclusive growth and efficient governance in business dealings at all levels. The demonetisation drive coupled with recent regulatory changes such as implementation of RERA and GST are expected to drive transparency, institutionalisation and operational efficiency in the real estate sector. This would go a long way in increasing consumer confidence and bring back customers and investors to the real estate sector. The sector already has a significant pent up demand and these changes along with declining interest rates and government push for affordable housing should lead to a demand upswing and growth recovery in next few years. Mohit Malhotra MD & CEO Godrej Properties Government reforms such as RERA, GST, Insolvency and Bankruptcy Code, labour law reforms, automation of approval processes, etc., have brought about greater transparency in the sector and we expect these to significantly contribute to the ease of doing business. Indian real estate has seen FDI inflow of approximately USD25 billion in FY17. These reform measures shall further boost investor and consumer confidence in the sector. The real estate sector is one of the largest employment generating sectors of the economy. Infrastructure investment initiatives by the government, focus on skill development, etc. can support the country s growing urban landscape, which in turn augurs well for the real estate industry. Further, Real Estate Investment Trusts and Infrastructure Investment Trusts are aimed at institutionalising the commercial real estate market and providing an attractive avenue for retail and institutional investors to invest in real estate sector. In a post RERA environment, foreign funds are increasingly pursuing equity opportunities with developers that are modelled around strong corporate governance, have proven execution credentials, have capacity to participate in investments and lead development efforts. While the residential sector has seen lower sales, I firmly believe that the sector will bounce to normalcy once the regulatory measures begin to take effect. Neel Raheja Group President K Raheja Corp Rajeev Piramal Executive Vice-Chairman and Managing Director Peninsula Land

10 Leader speaks j Indian real estate - Decoding institutional investments Indian real estate Well-positioned assets with growth potential always attracts investors interest. With a lot of liquidity chasing a few good projects, there is intense competition to seize good investment opportunities. Some PE funds moved towards debtlike structures. This is the case with developers with brand image and proven record of good performance. Decoding institutional investments However, at the same time there are several marginal developers in Indian real estates. Project delays and repayment pressures pose a great challenge on the developers; thus, in order to cope-up, innovative forms of investments are fast replacing plain PE and debt lending. Investors are now lining-up with special situation funds, uniquely themed funds and construction finance to grab the situation. The Indian Real Estate sector is poised for sustainable growth (driven by organised players rather than the mushroomed unorganised ones) driven majorly by sector reforms RERA, GST, falling Interest interest rates and the government s positive outlook to enable affordable housing. The government is however yet to rationalise the approvals processes and cost which greatly add to the premiums and interest. The developers are now witnessing growing portion of organised lending, majorly led by PE though banks and housing finance companies which are a stable source; per-leased and under-construction commercial developments have been the preferred class for institutional investors with an expected yield of about 9 per cent We expect the residential market (said especially product and end user driven) to experience higher traction driven by product rather than scheme, from the institutional investors. However, most of them currently are stuck with expected returns in excess of 22 per cent which is not sustainable and will have to be moderated or transitioned to pure equity M. Murali Managing Director Shriram Properties Ashish Raheja Managing Director Raheja Universal All views and opinions expressed herein are those of the authors and do not necessarily represent the views of KPMG in India.

11 k With ongoing economic reforms and an investor-friendly business environment, the Indian realty market has become more attractive and transparent inculcating confidence among domestic as well as global investors. From being largely unorganised and supported by traditional bank funding, the sector has evolved into an organised set-up attracting investors ranging from PE, SWFs, hedge funds, HNIs as well as large Indian corporates. The market is witnessing a shift from traditional investible assets such as residential to a strengthening office sector which has been witnessing rising rentals, low vacancy with better returns and stable yields. Large SWFs and foreign institutional investors have been showing interest in partnering with developers having quality office assets and established track records while alternate assets such as logistic and warehousing are also gaining interest with GST being implemented. The advent of new regulations and increasing participation by sophisticated institutional investors in multiple asset classes bodes well for the future of the industry. While investments have been dominated by global institutions, the domestic savings pool shall hopefully come to the party soon. All this means a more liquid, transparent and institutionalised market and greater financialisation of the real estate asset class which is a sign of a maturing market. Sanjay Dutt CEO Operations and Private Funds, Ascendas-Singbridge India S. Sriniwasan Managing Director Kotak Investment Advisors Limited

12 l Indian real estate - Decoding institutional investments Table of Indian real estate contents Decoding institutional investments

13 m 1 Institutional investment at an all-time high Commercial assets gain preference 1.2 Foreign investors contribute over 80 per cent to total investment 1.3 Pension funds and SWF pumps in about USD3 billion in PE funds and NBFCs emerged as the largest investors for under-construction 1.5 Investors explore markets outside metro cities 2 Office market update 7

14 1 Indian real estate - Decoding institutional investments 1. Institutional Indian real estate investment on a rise Decoding institutional investments

15 2 Institutional investments have witnessed a significant growth over the last few years. Supported by strong economic fundamentals, regulatory reforms and availability of large and attractive assets, especially in the commercial segment, Indian real estate sector has attracted several big-ticket investments. The investment has increased steadily from about USD5.2 billion in 2013 to about USD7.1 billion in The increase is primarily driven by private institutional investors. Private institutional investors at the forefront: 1 Private institutional investors, comprising of Private Equity (PE), Sovereign Wealth Fund (SWF), Pension Funds, and Non-Banking Financial Companies (NBFCs), have been at the forefront of capital infusion over the last few years. Annual investments have increased by nearly 560 per cent from 2013 to These investors now account for almost 85 per cent of the total investment, up from 32 per cent in Cumulative investment from 2013 to YTD stands at USD20 billion, half of which has come in from 2016 onwards. Average deal size more than double in 2017 The average deal size has more than doubled to USD111 million in 2017 against sub-50 million deals witnessed earlier. Last two years has seen two billion dollar plus deals in the office space segment. These investments reflect improved confidence of domestic as well as foreign institutional investors in the Indian economy and the real estate sector. Institutional investment break up ( ) Banks lending to developers 37% Pension Funds 4% NBFC 12% Sovereign Wealth Funds 9% Private Equity 38% Nearly 53% of total investments during 2013-YTD2017, have been recorded over past 20 months alone Deal size more than doubled in 2017 Indian realty witnesses billion dollar plus deal in Mumbai and Gurgaon Private institutional investment (excluding banks) 111 Investor outlook looks positive with PE funds regaining confidence in the sector and growing interest from both foreign pension funds and SWFs. Pension funds and SWF have recently become active- invested USD4.2 billion since 2016 USD4.8 billion invested by PE since 2016 Banks accounted for only 17 per cent of total investment in 2016; down from 83 per cent in YTD-2017 Investments (USD billion) Average deal size (USD million) Private institutional investors comprises of PEs, NBFCs, SWFs and Pension Funds through debt and equity routes Source: Handbook of statistics; Reserve Bank of India, accessed on 7 September 2017; Real Capital Analytics, accessed on 7 September 2017; Venture Intelligence, accessed on 7 September Real Capital Analytics, accessed on 07 September 2017, KPMG in India s analysis, 2017

16 3 Indian real estate - Decoding institutional investments 1.1 Commercial assets gain preference Commercial assets rent generating leased office, warehouse Indian and real estate retail assets have been the most preferred asset class in the real estate by investors over last couple of years. It has attracted about 80 per cent of total investments between 2016 and YTD While office assets have cumulatively attracted USD3.7 billion between 2013 and 2015; USD5 billion has been invested since Warehousing, with the implementation of GST, has witnessed investment of about USD1.1 billion since 2016 a 70 per cent jump from USD636 million between 2013 and Rising occupancy levels in well managed and established malls/shopping centers has resulted in investment worth USD1.8 billion since 2016 into retail assets. Investment in residential assets have witnessed some stagnation over the last couple of years. The USD2.4 billion investments made in this segment stands 33 per cent lower than investments made during Break-up of investment by asset class (since 2016) Warehouse Decoding institutional 10% investments Retail 16% Residential 23% Mixed use 4% Office 47% Source: Real Capital Analytics, accessed on 07 September 2017 Residential 15% Change in share in total investment (2016-YTD2017 over ) Mixed use Office Retail Warehouse 8% 3% 10% 16% 1.2 Foreign investors contribute over 80 per cent to total investment The total annual investment from foreign investors has consistently outpaced their domestic counterparts, with close to USD9 billion invested by foreign investors against USD2.1 billion invested by Indian investors since Participation from few countries such as Canada, Hong Kong, Netherlands and Qatar has gained prominence over traditional investors from Singapore and United States (U.S.). Overall, these countries have gained an additional share of about 24 per cent (2016-YTD2017 over ). Since 2016, investments by foreign funds has mostly been in commercial assets such as office space, warehouse and retail. However, investors from Hong Kong have invested primarily in residential assets. Investors from India have largely allocated capital towards residential projects. Investment break-up by geography since 2016 Canada India 19% 19% Qatar 7% The foreign investors base having interest in Indian realty is rising, with new investors from Netherlands and Hong Kong garnering additional 9 per cent and 6 per cent share (2016-YTD2017 over ). Note: 4 per cent contribution from other countries Singapore 20% USA 19% Netherlands 6% Hong Kong 6% Source: Real Capital Analytics, accessed on 07 September 2017

17 4 1.3 Pension funds and SWF pumps in about USD3 billion in 2017 In 2017, pension funds invested more than USD1.1 billion in Indian real estate sector this year and are the second largest investor after PE. On the other hand, SWFs which were investing about USD million on an annual basis since 2014 have deployed about USD1.8 billion this year. While pension funds have shown interest in retail, warehousing and office assets; SWF have mostly invested in office and residential space. Investments for both are flowing into metro and tier 1 cities. Investment by pension fund 1.1 Pension fund investment asset class wise (USD million) since 2013 USD billion Warehouse 1,000 Retail 709 Office 220 Others YTD-2017 Interest from foreign pension funds and sovereign wealth funds in Indian realty is rising y-o-y SWF investment in Indian real estate SWF investment asset class wise (USD million) since USD billion Office 2,342 Mixed-used 622 Warehouse 470 Residential 323 Retail YTD-2017 Source: Real Capital Analytics, accessed on 07 September 2017

18 5 Indian real estate - Decoding institutional investments 1.4 PE funds and NBFCs emerge as the largest investors for under-construction projects Indian real estate In 2016, PE and NBFCs have together extended credit of USD4.6 billion to developers against USD1.3 billion extended by banks. Rising Non-Performing Assets (NPAs), higher risk provisioning and mounting losses have led to significant reduction in credit offered by banks. However, with improved transparency and governance in the sector, the funding from banking sector may increase on the back of reduced risk. Annual lending to real estate developers (only for under-construction properties) (USD billion) Year PE and NBFCs Banks YTD NA Source: Real Capital Analytics, accessed 07 September 2017; Handbook of statistics, Reserve Bank of India, accessed 07 September 2017 Decoding institutional investments Investor prefer debt/structured debt: Most investment since 2016 has been through debt/ structured debt route. Major reasons for this shift have been stricter regulatory oversight, higher execution risks, slowdown in residential sales and declining profit margins of developers. Unlike an equity model of funding, a structured debt model allows an investor the exit route at a pre-determined return. Investments are also backed by at least twice the asset cover received from developers. Split between equity and debt by PE and NBFCs (under-construction properties) (USD billion) % of the total investments in under-construction projects have come through debt/structured debt route, with rising refinancing needs of the developers to repay their existing lenders YTD-2017 Equity Debt Source: Real Capital Analytics, accessed on 07 September 2017

19 6 1.5 Investors explore markets outside metro cities Over the last few years, investors have started exploring markets other than metro cities of Delhi-NCR, Mumbai, Bengaluru, Chennai, Hyderabad and Kolkata. Metro sub-urban markets such as Sohna, Thane, Pune, Greater Noida, Chengalpattu and non-metro markets such as Chandigarh, Mohali and Amritsar, Ahmedabad have witnessed increased traction. In metro cities, investors have been focusing primarily on office and residential assets. However, in non-metro, investors appears to have diversified their investment into different asset classes including warehousing, retail, office and residential. Investment break-up by geoghraphy (USD million) , ,955 1, ,494 1, Metro Non metro Metro-suburb Source: Real Capital Analytics, accessed on 07 September 2017; KPMG in India s analysis, september ,588 1,880 YTD-2017 Metro cities asset class breakup (since 2016) Non-metro cities asset class breakup (since 2016) Residential, 30% Retail, 4% Mixed-use, 6% Office, 60% Source: Real Capital Analytics, accessed on 07 September 2017 Retail, 33% Residential, 11% Warehouse, 32% Office, 22% Mixed-use, 2% Metro cities have attracted significant share of the total investments into leased office assets, and non-metro cities garnered highest interest in retail and warehousing assets. Change in investment in major cities (2016-YTD2017 over ) Delhi-NCR 22% Includes Delhi, Gurgaon and Noida Mumbai 64% Pune 9% Source: Real Capital Analytics, accessed on 07 September 2017; KPMG in India s analysis, september 2017 Chennai 70% Bengaluru 64%

20 7 Indian real estate - Decoding institutional investments 2. Office market Indian real estate update Decoding institutional investments

21 8 Key highlights Of the total stock of about 672 million sq ft across 14 key cities, nearly 30 per cent has come-up since 2013, and about one-third (33 per cent) is absorbed since 2013 Annually, the average supply and absorption recorded was 45 million sq ft and 42 million sq ft respectively during period. Total absorption has outpaced new supply by wide margin during 2015 and 2016 The overall vacancy rates have reduced from 23 per cent in 2013 to around 19 per cent at the end of June Owing to reducing vacancy levels, rentals across major economic corridors have been on an uptrend Over the next three years, about million sq ft of new space, is expected to hit the market, taking office space supply to around 850 million sq ft Among major occupiers, IT-BPM continues to remain the leading occupier of office space in the country REIT is emerging as a new avenue to raise funds by listing of rent generating leased assets through REITs platform It is estimated that India has about 280 to 300 million sq ft of REIT-able assets across key seven cities in India Co-working spaces are gaining popularity among both occupiers and real estate developers, having a potential market size of 12 to 16 million sq ft presently. The co-working segment in India is expected to receive USD400 to 500 million in funding over the next 18 months. Mumbai MMR, Bengaluru and Delhi-NCR presents the best opportunity for creating coworking offices.

22 9 Indian real estate - Decoding institutional investments Pan India trends India s economic growth supported by government spending, economic activity and positive investor sentiment resulted in significant offtake in office space Indian real estate leasing over the last few years. Further, the growth has surpassed most of its major peers, pushing corporates to lease higher space to accommodate growth in the workforce requirement. Additionally, occupiers have been focusing on relocation to newer workplaces options that are replete with modern facilities and offer opportunities to consolidate and create better operations and cost efficiencies. Supported by above factors, the leasing activity has been strong and has averaged 42.7 million sq ft annually during Significant supply of new office space has come up in last five years supported by buoyed demand. Of the total completed stock of about 672 million sq ft across 14 key 37 Decoding Pan India - institutional Supply, absorption and investments vacancy trends 23% 22% % H12017 Absorption (million sq ft) Supply (million sq ft) Vacancy (%) cities, about 30 per cent has come up since Owing to strong demand from occupiers, the leasing activity has outpaced the supply addition during 2015 and 2016, thereby reducing the vacancy levels steadily since Despite an addition of about 200 million sq ft of space in last five years, vacancy rates have reduced from 23 per cent to around 19 per cent. Owing to reducing vacancy levels, rentals across major economic corridors have appreciated over the last few years. Among major occupiers, IT-BPM continues to remain the leading occupier of office space in the country. In 2016, it accounted for more than 50 per cent of the total net leasing, down from 70 per cent from past few years. Amid ongoing global uncertainties, this could be an area of concern since the performance of the corporate real estate segment in India is largely dependent on the outsourcing needs of global IT corporates. 19% 19% With absorption outpacing supply in past few years, the gap between demand and supply is narrowing, thereby leading to declining vacancy levels y-o-y. Source: PE Analytics, accessed on 07 September 2017 Trends in key regions Bengaluru accounts for the highest share of completed office stock in the country, garnering 23 per cent share (153 million sq ft) in total office stock of 672 million sq ft. It was closely followed by Mumbai-MMR and Delhi- NCR regions, with 22 per cent and 21 per cent share respectively. Together, these three cities account for Source: PE Analytics, accessed on 07 September 2017 Regional share in total office stock Hyderabad, 9% Chennai, 10% Pune, 10% NCR, 21% Kolkata, 5% Bengaluru, 23% MMR, 22% nearly two-third (66 per cent) of the total office stock across key regions in India. Furthermore, these three regions put together attracted over 56 per cent of the total investments made by institutional investors during 2013-August 2017 period. The absorption levels across key Indian cities have remained healthy with an average annual absorption of 8-12 million sq ft annually across the cities of Bengaluru, Top cities with highest office space absorption in 1H2017 (million sq ft) Mumbai Metropolitan region Bengaluru Hyderabad Source: PE Analytics, accessed on 07 September 2017

23 10 Delhi-NCR and Mumbai alone. The numbers have been encouraging on the supply side as well with Bengaluru and Delhi-NCR witnessing about 11 million sq ft of annual supply on an average during ; MMR region and Pune have recorded about 9 million sq ft and 5 million sq ft average annual supply. Vacancy levels across key regional markets, namely Bengaluru, Delhi-NCR, MMR and Pune have dropped by 5 to 8 per cent between 2013 and June As a result, the established economic hubs have witnessed appreciation in rental values. Top cities with highest office space supply in 1H2017 (million sq ft) Delhi-NCR Top cities with lowest vacancy level in 1H2017 Chennai - 7% Mumbai Metropolitan region Bengaluru - 8% Source: PE Analytics, accessed on 07 September 2017 Hyderabad Hyderabad - 12% Outlook New completions to take the total office stock to 850 million sq.ft Over next three years, about million sq ft of new space is expected to hit the market taking office space supply to around 850 million sq ft. Most of the new supply is expected to come up in Delhi-NCR (90 million sq ft), followed by 20 million sq ft each in Bengaluru and Mumbai. REITs an emerging avenue of fund raising for developers REIT holds the potential to transform the Indian real estate sector, especially with respect to inculcating an asset light model in realty business. REITs are expected to unbundle the development and investment activities of the property development business. REIT are expected to help improve liquidity in the real estate sector as it provides an exit channel to owners of completed and leased out assets. It is estimated that India has about million sq ft of REIT-able assets across key seven cities in India which is growing rapidly. 2 New CRE business models such as co-working gains traction New commercial real estate management models such as co-working spaces, flexible working hours or agile working, work from home, plug-and-play cubicles, and hot-desking etc. are emerging rapidly to address the needs of the evolving ecosystem and requirements of corporate occupiers. Several organisations across India, especially from the IT-BPM, start-ups and small and medium enterprises (SMEs) segments, are adopting innovative ways to rationalize their real estate requirements. Key factors leading to this transformation are: Increasing adoption of automation and artificial intelligence leading to rationalisation of workforce by IT-BPM sector Disruption and innovation largely being created by a sharing economy The high cost of establishing and maintaining office space make this traditional model unviable for leaner organisations especially within the start-up, entrepreneurial segments and SMEs Networking opportunities through alternate CRE business models such as co-working spaces. Co-working space has gained significant popularity in recent past with the corporate occupiers and commercial assets owners are also evaluating it as part of their CRE strategy. Generally, occupancy levels in coworking space have been over 80 to 85 per cent. The market size for the co-working segment across India currently stands in the range of 12 to 16 million sq ft. Seeing the opportunity, and an anticipated high double digit growth of per cent per annum, host of domestic as well as foreign investors have entered or planning to invest in co-working segment : The inflection point of Indian real estate, JLL, 2017, 3. Future of Work, JLL, 2017

24 KPMG in India contacts: Mritunjay Kapur Partner and National Head Strategy Indian and real Markets estate Leader - Technology, Media and Telecom T: E: mritunjay@kpmg.com Neeraj Bansal Partner and Head ASEAN Corridor Building, Construction and Real Estate T: E: nbansal@kpmg.com Pradeep Udhas Office Managing Partner - West T: E: pradeepudhas@kpmg.com Nitin Atroley Office Managing Partner - North T: E: nitinatroley@kpmg.com Shalini Pillay Office Managing Partner - South Head - People, Change and Culture T: E: shalinipillay@kpmg.com Decoding institutional investments KPMG.com/in Follow us on: kpmg.com/in/socialmedia The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. For e-commumication only