R E A L E S TAT E. November 2010

R E A L E S TAT E November 2010

REAL ESTATE November 2010 Contents Advantage India Market overview Industry infrastructure Investments Policy and regulatory framework Opportunities Industry associations 2

ADVANTAGE INDIA Advantage India The Indian real estate industry is expected to be valued at US$ 180 billion (INR 8,640 billion) by 2020. India has a young population. Urbanisation is increasing steadily. Growth in the services sector telecom, financial services and IT & ITeS has been significant. Household income is rising. FDI of up to 100 per cent is allowed under the automatic route in most asset classes. Multiple growth drivers Increased foreign investments High growth projections Advantage India Well-defined regulatory framework Rapid evolution of the sector Demand for affordable housing The GoI has well-drafted national- and state-level regulations for the Indian real estate sector. Some old laws are either being amended or repealed to introduce reforms to the industry. The real estate sector in India is on a rapid growth trajectory. In a short span of time, the industry has evolved from a highly fragmented and unorganised market into a semi-organised market, with a large number of listed companies. There is a significant shortage of lowcost and affordable housing in the country. The Government of India (GoI) has announced low interest rates for home loans up to INR 2 million. Meanwhile, several developers, attracted by the opportunity in this segment, have launched affordable housing projects. Sources: Confederation of Real Estate Developers Association of India (CREDAI) website, accessed 12 March 2010; Ernst & Young-FICCI Real Estate Report 2009; Eleventh Five-Year Plan (2007 2012). 3

REAL ESTATE November 2010 Contents Advantage India Market overview Industry infrastructure Investments Policy and regulatory framework Opportunities Industry associations 4

MARKET OVERVIEW Market overview The real estate sector is a key growth driver of the country s economy. The contribution of the residential segment alone to India s GDP is around 5 to 6 per cent. The real estate sector is one of the highest FDI-attracting sectors in India, with recorded FDI inflow of more than US$ 8.9 billion (INR 403 billion) between April 2000 and September 2010. Favourable demographics (a young population and increasing urbanisation) and growth in the services sector, especially the IT & ITeS sector, have primarily driven growth in the real estate industry. DLF, Unitech, Ansal Properties, K. Raheja Corporation and Parsvnath Developers are among the major Indian players in the sector. In the last decade, FDI in real estate has increased due to the growing interest of foreign players in the Indian market. Over the last decade, many international players, including developers such as Emaar, Ascendas, Keppel Land, Tishman Speyer and Nakheel Group, and investors such as Morgan Stanley, Och- Ziff Capital, Citigroup, Goldman Sachs, JP Morgan, Warburg Pincus and Deutsche Bank, have entered the Indian real estate market. Sources: Confederation of Real Estate Developers Association of India (CREDAI) website, accessed 23 March 2010; Ernst & Young-FICCI Real Estate Report 2009; Eleventh Five-Year Plan (2007 2012). 5

MARKET OVERVIEW Market segments Real estate sector Residential space Commercial (office) space Retail space Hospitality space Special economic zones (SEZs) In recent years, the industry has evolved from a highly fragmented and unorganised market into a semiorganised market. The sector can be divided into residential, commercial, retail and hospitality asset classes. 6

MARKET OVERVIEW Residential space (1/2) The residential segment constitutes the bulk of the real estate market. Growth drivers Market structure Segmentation Outlook Rapid urbanisation the urban population is estimated to reach 590 million by 2030. Decreasing household size growth in the number of nuclear families is leading to an increase in the number of households, especially middle-class households. India is expected to be home to 91 million middle-class households by 2030. The growing working age population in the 15 60 age group is expected to reach 918 million, or 64 per cent, of the population by 2025. The demand for affordable housing is growing, which is a priority segment for both the government and developers. The market is highly fragmented and unorganised. Regional players are expanding to achieve a pan-india presence. Broad categories include low-cost housing, mid-market housing and premium housing. The country s housing shortage in 2007 totalled 24 million units, and this is expected to increase to more than 26 million units by 2012. While the GoI has announced reduced interest rates for home loans up to US$ 41,667 (INR 2 million), developers have announced the launch of affordable housing projects, which are expected to mostly be developed in the suburbs of large cities and tier-i and tier-ii cities. Sources: Ernst & Young-FICCI Real Estate Report 2009; World Urbanisation Prospects: The 2009 Revision Population Database, United Nations Department of Economic and Social Affairs Population Division website, http://esa.un.org/wup2009/unup/p2k0data.asp, accessed 6 December 2010; India s Urban Future, Resource Investor website, www.resourceinvestor.com/news/2010/5/pages/indias-urban- Future.aspx, accessed 6 December 2010; World Urbanisation Prospects: The 2008 Revision Population Database, United Nations Department of Economic and Social Affairs Population Division website, http://esa.un.org/unpp/p2k0data.asp, accessed 6 December 2010.. 7

MARKET OVERVIEW Residential space (2/2) Growing urbanisation in India 60 50 40 30 20 10 0 1970 1980 1990 2000 2010E 2015E Urban population (in per cent) Cities with population more than 1 million (no of cities) Source: World Urbanisation Prospects: The 2009 Revision Population Database, United Nations Department of Economic and Social Affairs Population Division website, http://esa.un.org/unpp/p2k0data.asp, accessed 6 December 2010. 8

MARKET OVERVIEW Commercial office space Growth drivers Market structure The commercial real estate (CRE) segment (primarily office space) has expanded on the back of growth in the Indian economy. The influx of multinational companies (MNCs) and the growth of the services sector have driven the demand for office space. Progressive liberalisation and the relaxation of FDI norms in various sectors have paved the way for growth in FDI in the real estate sector. This, in turn, has led to a burgeoning demand for office space from MNCs and other foreign investors. A few large national developers with a pan-india presence dominate the market. Regional players are expanding aggressively to achieve a pan-india presence. The operational model has witnessed a shift, from a sale model to a lease-and-maintenance model. Segmentation Business activity is shifting from central business district (CBD) to the special business district (SBD) and from tier-i cities to tier-ii cities. Outlook The demand for office space is expected to increase driven by the growth in the services industry, which includes telecom, financial services and IT & ITeS, which accounts for the maximum demand of commercial office space in the country. 9

MARKET OVERVIEW Retail space Growth drivers Market structure Segmentation Outlook Consumerism is increasing on the back of rising disposable income. Organised retailing has grown. The entry of international retailers has boosted industry growth. Expansion by domestic retailers has also given impetus to the industry. The retail segment constitutes a small proportion of the total real estate industry in India. Unorganised retail space providers dominate the segment. In the organised retailing segment, the demand for quality mall space has increased with the entry of international retailers in India. International retail brands are collaborating with Indian partners. Contribution of organised retail to the retail industry increased from 2 per cent in 2003 to 4 5 per cent in 2009. International retailers are present through the franchisee route. The Ministry of Commerce and Industry has proposed 100 per cent FDI for multi brand retail outlets, the approval for which is awaited. The share of organised retail in the total Indian retail trade pie is projected to grow at 40 per cent per annum. 10

MARKET OVERVIEW Hospitality space Growth drivers Market structure The hospitality segment has witnessed robust demand growth, primarily due to strong growth in tourism, including both business and leisure travel. India is becoming increasingly popular as a medical tourism destination. International sporting events such as the Cricket World Cup and Formula 1 in 2011 are expected to drive growth. According to a research by the World Travel & Tourism Council, travel and tourism demand in India is expected to grow at 11.8 per cent between 2005 and 2010. Existing hotel operators are scaling up their operations. International hotel chains are entering India. Developers are tying up with major domestic and international chains. Hospitality players are diversifying into budget hotels and service apartments. Segments Outlook The industry is classified on the basis of star ratings one-star to five-star deluxe. Number of approved hotel rooms has been estimated at 100,000. A significant demand-supply gap characterises the segment. The demand for hotel rooms is around 240,000 rooms, while the current supply of hotel rooms caters to approximately100,000. This gap is expected to reduce in future, as several hotel projects are in the pipeline. More than 15,600 rooms are expected to be added in 2010. The potential for budget hotels, service apartments, spas and other niche products is significant. Sources, Statistics, Ministry of Tourism (Government of India) website, http://tourism.gov.in, accessed 21 September 2010; Hotel industry in India to see addition of 15,600 rooms in 2010, HospitalitybizIndia.com website, http://www.hospitalitybizindia.com/detailnews.aspx?aid=7110&sid=1, accessed 29 January 2010.; Travel and tourism economic impact: India, 2010, World Travel and Tourism Council website, www.wttc.org, accessed 2 December 2010. 11

MARKET OVERVIEW Growth drivers Demand pull factors Supply push factors Robust and sustained macroeconomic growth. Upsurge in industrial and business activity, especially in new economy sectors. Favourable demographic parameters. Significant rise in consumerism. Rapid urbanisation. Availability of a range of financing options at affordable interest rates. Impact Increasing occupier base. Significant rise in demand for office/industrial space. Demand for new avenues for entertainment, leisure and shopping. Creation of demand for new housing. Growing Indian real estate Policy and regulatory reforms (100 per cent FDI relaxation). Positive outlook of global investors. Fiscal incentives to developers. Simplification of urban development guidelines. Infrastructure support and development initiatives from the GoI. Impact Entry of several domestic and foreign players; increasing competition and consumer affordability. Easy access to project-financing options. Increased developers risk appetite and largescale development. Improved quality of real estate assets. Development of new urban areas and effective utilisation of prime land parcels in large cities. 12

MARKET OVERVIEW Key trends (1/2) Geographic deconcentration of real estate activity from large metros Real estate activity is becoming geographically de-concentrated from large metros Bengaluru, Chennai, Mumbai and NCR to tier-ii and tier-iii cities (cities such as Chandigarh, Chennai, Jaipur, Pune, Hyderabad, Kochi and Visakhapatnam). The shift of IT-BPO companies toward tier-ii and tier-iii cities, which has increased the demand for commercial and hospitality real estate, has primarily driven this transition. The concept of green buildings has gained popularity over the past five years. The number of registered green buildings in the country has increased from 1 in 2000 to 80 in 2009. Green buildings are gaining popularity Many real estate projects in India have acquired Leadership in Energy and Environmental Design (LEEDS) certification, which certifies that a building has been designed and developed using strategies that ensure the conservation of material and the optimum use of resources. Further, several real estate developers are using this concept as an opportunity to differentiate themselves in the competitive real estate market. 13

MARKET OVERVIEW Key trends (2/2) Realizing the acute shortage of affordable housing, this segment became a priority for both the GoI and developers. Affordable housing is still the buzzword While the GoI announced low interest rate for home loans up to INR2 million, developers announced the launch of affordable housing projects, most of which are expected to be developed in the suburbs of large cities and tier-i and tier-ii cities. Integrated townships also gained popularity, as they are attractive for both buyers and developers. These projects offer value for money and better lifestyle to consumers and enable the walk-towork environment by providing residential areas and other facilities close to workplaces. These projects allow developers to diversify their risks and achieve high margins. With the recovery in the economy, demand for luxury residential segment has also picked up. Recovery in demand for luxury projects Demand in this segment is driven by HNIs and NRIs. In the past few months, developers have launched luxury projects especially in metros. For instance, Emaar MGF launched a luxury residential project, Marbella, in Gurgaon in December 2010. 14

MARKET OVERVIEW Key players Indian (1/2) Unitech DLF Ansal Properties Unitech operates in various asset classes in the residential, commercial and retail segments. Unitech has developed more than 24 million sq ft of property, with six townships. Eleven hospitality projects are under development across India. Unitech is currently developing five IT & ITeS SEZs and one IT Park spread across Gurgaon, Noida, Greater Noida and Kolkata, with potential leasable area of 21.4 million sq ft The company has strong presence in the National Capital Region (NCR) and other cities such as Kolkata, Chennai and Hyderabad. DLF is the largest real estate developer in India. DLF developed Asia's largest private township, DLF City in Gurgaon, Haryana, spread across 3,000 acres. The company is present across all asset classes residential, commercial and retail. The group has developed more than 220 million sq ft of built-up area (BUA). DLF specialises in planning hotels, infrastructure and SEZs. DLF has enhanced its focus on affordable housing. DLF has a pan-india footprint, with a major presence in Gurgaon and Kolkata. Ansal Properties operates primarily in residential and commercial asset classes. The company has developed on more than 2,850 acres in Gurgaon and Delhi. Ansal Properties is currently developing integrated townships, malls, hotels IT parks and SEZs. The company plans to construct 157.6 million sq ft of BUA. Ansal Properties has a pan-india footprint, with a major presence in 16 North Indian cities across 4 states. 15

MARKET OVERVIEW Key players Indian (2/2) K. Raheja Corporation Sobha Developers Parsvnath Developers The company is present in commercial, retail and residential asset classes. The company has developed more than 5 million sq ft of BUA to date. K. Raheja Corporation is currently developing 15 self-contained townships and 10 hotels. The company has a strong presence in Mumbai, with operations in Bengaluru, Ahmedabad, Goa, Pune and Hyderabad. Sobha Developers operates in residential and commercial asset classes. It also develops plots and contractual projects. The company completed 60 residential projects and 166 contractual projects covering around 36.34 million sq ft of area as of March 31, 2010 in 18 cities across India. The company currently has 27 residential projects, aggregating 9.08 million sq ft, at the development stage and 4.24 million sq ft in ongoing contractual projects. Sobha Developers is primarily concentrated in Bengaluru, but it also has a presence in other cities such as Cochin, Chennai and Pune. The company has a presence in residential, retail, commercial and SEZ asset classes. Parsvnath has around193 million sq ft under development. The company has 98 ongoing projects. It has a strong presence in the NCR. The company, active in more than 45 cities across 16 states, is strengthening its pan-india footprint. 16

REAL ESTATE November 2010 Contents Advantage India Market overview Industry infrastructure Investments Policy and regulatory framework Opportunities Industry associations 17

INDUSTRY INFRASTRUCTURE Industry infrastructure SEZs The GoI introduced the SEZ Act, 2005, to generate additional economic activity, promote exports and create employment opportunities in the country. Developing an SEZ is approximately 15 to 20 per cent less expensive than developing non-sez commercial space, given the various fiscal benefits available to SEZ developers. Several real estate developers have been attracted to these projects. Under the new SEZ Policy, formal approvals have been granted to 579 SEZ proposals as of November 2010. As of November 2010, there were 367 notified SEZs, and 155 have received in-principle approval. Industry-wise classification of formally approved SEZs 6 per cent IT/ITES 4 per cent 3 per cent Others 4 per cent 22 per cent 62 per cent Multi-product Textile Pharma Biotech Source: SEZ India website, www.sezindia.nic.in, accessed 6 December 2010. The SEZ Policy allows the use of as much as 50 per cent of the SEZ area as a non-processing zone, offering significant potential for residential and support infrastructure. Source: SEZ India website, www.sezindia.nic.in, accessed 6 December 2010. 18

REAL ESTATE November 2010 Contents Advantage India Market overview Industry infrastructure Investments Policy and regulatory framework Opportunities Industry associations 19

INESTMENTS Investments FDI in Indian real estate Over the years, FDI in real estate has increased due to growing interest among foreign players in the Indian market. FDI inflow to the sector from April 2000 to September 2010 was US$ 8.9 billion, of which US$ 2.8 billion was invested in 2009 2010 alone. The majority of FDI is from West Asia and investors from the US and Europe, who have shown keen interest in the launch of several real estate funds. Source: FDI statistics, Department of Industrial Policy and Promotion website, www.dipp.nic.in/fdi_statistics/indian_fdi_september2010.pdf, accessed 6 December 2010. 20

REAL ESTATE November 2010 Contents Advantage India Market overview Industry infrastructure Investments Policy and regulatory framework Opportunities Industry associations 21

POLICY AND REGULATORY FRAMEWORK Policy and regulatory framework (1/2) Guidelines for FDI in real estate in India Conditions for development Conditions for investment Other conditions A minimum of 10 hectares must be developed for serviced housing plots. For construction-development projects, a minimum BUA of 50,000 sq m has been prescribed. In case of a combination project, any one of the two conditions mentioned above should be met. At least 50 per cent of the project must be developed within five years from the date of statutory clearances. Minimum capitalisation of US$ 10 million for wholly owned subsidiaries and US$ 5 million for JVs with Indian partners. Funds must be infused within six months of business commencing. Original investment cannot be repatriated before a period of three years from the completion of minimum capitalisation. The investor may be permitted to exit earlier with prior government approval. The investor is not permitted to sell undeveloped plots. The project must conform to norms and standards laid down by respective state authorities. The investor is responsible for obtaining all necessary approvals as prescribed under applicable state rules/bye-iaws/regulations. A designated authority must monitor developer s compliance of the conditions mentioned above. Source: India Foreign Direct Investment Policy 22

POLICY AND REGULATORY FRAMEWORK Policy and regulatory framework (2/2) Budget analysis Union Budget 2010 impact on real estate Policy impact Direct tax impact Indirect tax impact The Finance Minister announced a scheme of interest subvention on housing loans in the Union Budget 2009 2010. The scheme allows interest subvention of 1 per cent on housing loans of up to US$ 20,833 (INR 1 million), provided the cost of a house does not exceed US$ 41,666 (INR 2 million). This scheme has now been extended up to March 31, 2011. Allocation for housing and urban poverty alleviation has been raised from US$ 177 million (INR 8.5 billion) to US$ 208 million (INR 10 billion) for 2010 11. Source: Ernst & Young India Budget 2010 Threshold slabs for individual taxation have broadened, which is expected to result in more disposable income for consumers. Corporate tax rates remain unchanged. However, the surcharge in the case of a domestic company with income of more than INR 10 million has been reduced from 10 per cent to 7.5 per cent. Minimum alternate tax (MAT) has been increased from 15 per cent to 18 per cent. The turnover threshold limit for auditing accounts (under Section 44AB) has been relaxed to US$ 12,500 (INR 6 million) from the existing limit of US$ 83,333 (INR 4 million). 23 Service tax rate has been maintained at 10.3 per cent. The relevant definition of taxable service, provided in relation to renting immovable property, has been amended with retrospective effect from June 2007 to clarify that renting immovable property will constitute a taxable service. Service tax will be levied on the lease of vacant land if the lessor undertakes construction on such land to further their business or commerce during the tenure of lease. Peak excise duty rate has been increased from 8 per cent to 10 per cent. Accordingly, peak effective customs duty has been increased from 24.42 per cent to 26.85 per cent.

REAL ESTATE November 2010 Contents Advantage India Market overview Industry infrastructure Investments Policy and regulatory framework Opportunities Industry associations 24

OPPORTUNITIES Opportunities The long-term view on the Indian real estate industry is positive, as fundamental demand drivers such as increasing urbanisation, favourable demographics, growth of the services sector and rising incomes are still intact. Major housing shortage According to the Eleventh Five Year Plan (2007 2012), the housing shortage in urban areas was estimated at 24.7 million units in 2007, of which more than 88 per cent was in the economically weaker section (EWS). Meanwhile, the housing shortage in rural areas was estimated at 47.4 million units in 2007. For the Plan period, the total housing requirement (including backlog) is estimated at 26.5 million units. This provides real estate developers with ample growth opportunities, as unmet demand remains significant. Retail space expected to increase in rural markets Growth of the services sector and organised retail, increasing urbanisation, rising income levels, contracting household sizes and the easy availability of home loans are key growth drivers of the industry. India has one of the largest number of retail outlets in the world. In the past few years, retail development has been taking place not only in major cities and metros, but also in tier-ii and tier-iii cities. Going forward, companies are expected to tap rural markets as their key growth drivers. This is expected to increase the demand for retail outlets in rural areas. 25

OPPORTUNITIES Opportunities emerging asset classes and formats Logistics and warehousing Healthcare infrastructure Education infrastructure Trade, both international and domestic, is booming. MNCs are increasingly establishing Indian operations. Agricultural logistics require the creation of cold-chain infrastructure. Logistics are required for large infrastructure and engineering projects. Consolidation of warehousing, if uniform tax regime is applied. The healthcare industry is expected to grow at 23 per cent per annum to become a US$ 77-billion industry by 2012. Healthcare BPO is another growing segment. With India emerging as a preferred destination for medical treatment, medical tourism in the country is expected to grow at 29 per cent to reach US$ 2.4 billion by 2012. The market is large, with significant untapped potential and low competition. Developing more world-class educational institutions is the need of the hour. Driven by knowledge-based industries, the demand for qualified engineers is significant. Research laboratories are adding value to global outsourcing. Interest among global educational institutions to set up institutions in India is growing. Sources: India s Healthcare Sector To Touch $77 Billion By 2012, Says Report, Indiaserver.com website, www.india-server.com/news/indiashealthcare-sector-to-touch-77-16742.html, accessed 6 December 2010; India real estate - shifting gears, Ernst & Young, 2008. 26

REAL ESTATE November 2010 Contents Advantage India Market overview Industry infrastructure Investments Policy and regulatory framework Opportunities Industry associations 27

INDUSTRY ASSOCIATIONS Industry associations The Confederation of Real Estate Developers Associations of India (CREDAI) National Secretariat, 703, Ansal Bhawan, 16, Kasturba Gandhi Marg, New Delhi 110 001 Tel: (011) 43126262/43126200 Fax: 91 11 43126211 E-mail: info@credai.org Website: www.credai.org Builders' Association of India (BAI) G-1/G-20, Commerce Centre, J. Dadajee Road, Tardeo, Mumbai 400034 Tel: 91 22 23514134, 23514802, 23520507 Fax : 91 22 23521328 E-mail: bai@vsnl.com, baihq.mumbai@gmail.com Website: www.baionline.in 28

NOTE Note Wherever applicable, numbers in the report have been rounded off to the nearest whole number. Conversion rate used: US$ 1= INR 48 29

REAL ESTATE November 2010 DISCLAIMER India Brand Equity Foundation (IBEF) engaged Ernst & Young Pvt Ltd to prepare this presentation and the same has been prepared by Ernst & Young in consultation with IBEF. All rights reserved. All copyright in this presentation and related works is solely and exclusively owned by IBEF. The same may not be reproduced, wholly or in part in any material form (including photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally to some other use of this presentation), modified or in any manner communicated to any third party except with the written approval of IBEF. This presentation is for information purposes only. While due care has been taken during the compilation of this presentation to ensure that the information is accurate to the best of Ernst & Young and IBEF s knowledge and belief, the content is not to be construed in any manner whatsoever as a substitute for professional advice. Ernst & Young and IBEF neither recommend nor endorse any specific products or services that may have been mentioned in this presentation and nor do they assume any liability or responsibility for the outcome of decisions taken as a result of any reliance placed on this presentation. Neither Ernst & Young nor IBEF shall be liable for any direct or indirect damages that may arise due to any act or omission on the part of the user due to any reliance placed or guidance taken from any portion of this presentation. 30