VOLUME 1 ISSUE 1

Chanakya
2 April 2007

Real Estate Outlook

OVERVIEW
Inside This Issue
The real estate sector in India has evolved and is moving fast from an
1 Real Estate Outlook unorganized to an organized sector. There has been a substantial
1 Real Estate Analysis increase in property prices, to an extent of 40%, over the last year which
is sustainable with the above average economic growth of 8.3%. The
3 News Snippets market is likely to boom for the next foreseeable future.

3 Market Snippets The companies that will draw maximum profitability would be those who
have (i) The ability to manage construction costs, (ii) Brand positioning,
4 Economic Snippets
(iii) Geographical area of operation and geographical diversity, size and
4 Economic Indicators quality of land bank, (iv) General risk strategy, (v) Strategy to ensure a
level of committed sales before taking up development and (vi) strong
5 Budget 2007-08 Financial profile.

6 Team Chanakya

6 Upcoming Events Real Estate Analysis

Demand Drivers

The recent vagaries in the stock market and the low return on bank
deposits have brought a perception of real estate to be a safe
investment. This is compounded by the growth of IT-ITeS industry which is
growing at 28% in 2006, large format retailing and hospitality, in
The size of the real particular. This massive growth figure of the manpower intensive
estate market is likely to knowledge economy industries is likely to increase the disposable
income of individuals and families. This will increase the demand for
go upto US$60 billion by quality real estate offerings.
2010 from the current
US$16 billion this is the Most of the above factors are likely to affect the demand positively.
highest growth sector While the cost, and to some extent availability, of loans is likely to be
constrained due to the recent overture of RBI and finance ministry
next to IT and ITeS. expressing fear of overheating property prices. However, demand may
be slightly moderated due to these factors.

Expansion in Supply
As per the ASSOCHAM study on the future of real estates the total size of
the real estate market is US$16 billion and is likely to go upto US$60 billion
by 2010. The study also bring out that the realty industry is constructing
projects worth of around US$12 billion. Real estate projects typically take
two to three years to develop and there is likely to be ample supply in
PAGE 2 CHANAKYA

the market given the projects those are already underway. The land
supply will increase with the trend of Government and corporates
freeing up their huge chunk of unutilized land with them. The potential
growth would be fully realized once the favorable FDI Policy, regulatory
controls such as the land ceiling acts, relaxed norms for built up area vis-
à-vis plot are eased.

Cost Pressures
Economic growth and the focus on infrastructure development have
created a boom in the construction industry. This has raised construction
India would need 10 costs, including the cost of major inputs such as steel and cement. The
million housing units per duel excise duty imposition on the cement sector has multiplied the
effect and is likely to increase the cement price by around 7% as per the
year by 2030 and the analysis of KPMG. The steel prices even though are in line with the global
current shortage of 20 prices, the increase in the iron ore prices world over is likely to have its
million will call for a impact on the Indian steel prices as well. To cap it all the recent
movement of urban land prices due to expansion of demand, agitation
massive growth
and compensation demands in the rural and semi-urban communities
are likely to add pressure to the developers on the cost of development.

Pricing Drivers
Demand-supply mismatches are likely to affect real estate prices
significantly. It is estimated that India would need 10 million housing units
per year by 2030. The current housing shortage of 20 million units will call
for massive growth in residential construction. This will also affect the
prices positively for the developers for the foreseeable future.

The present level of prices and concerns about overheating has

dampened sentiments to some extent. The serious measures that are
being taken by the RBI and Government of India are escalating the
threat. RBI is been guiding the banks to reduce the real estate exposure
and is continuously increasing the risk rating of such exposures. This will
make banks to reduce flow of debt money and increase the cost of
such money which will have its bearing on the price of real estates.
Hence, we feel that the market may experience a (pricing) correction in
the near future for a short time.

Financial impact on developers

Rising costs coupled with price pressure will affect developers’ margins.
Existing margins on projects developed on agricultural land or on land
available in the land bank acquired at historical prices have ample
cushion to absorb the effect. However, projects developed on
auctioned land or on land acquired at market rates may be severely
affected in the case of a price correction. Overall, as most of the
developers have a mix of projects, this risk will be spread over a larger
base.

The other financial impact is in the form of financing cost. With the high
risk rating of the debts to the real estate sector the financing cost is also
likely to increase.
CHANAKYA PAGE 3

News Snippets
Tata Group to Invest in Real Estate Market in India

The Tata group is planning to set up Tata Realty & Infrastructure

Company with a corpus of USD 1 billion with an aim to invest in the
Indian real estate sector. The company will invest in Residential and
Commercial Real Estate projects, SEZs and infrastructure projects like
ports, roads and airports. The company is likely to build seven town ship
projects in the area of 60 to 110 acres each in the outskirts of Mumbai,
Chennai, Delhi, Kolkatta and Bangalore in the initial phase. The
cumulative investment in the projects may exceed $2.27 billion. The
company has roped in KPMG to strategies on this venture.

Colachel port to be developed as a major port

Mr. TR Baalu minister of shipping, road transport and highways
informed the parliament that Tamil Nadu government has undertaken
a techno economic feasibility and detailed project reports as well as
environmental impact assessment studies to make Colachel Port as a
major port.

The project is to be implemented on BOT basis, for which a letter of

intent has been issued to the consortium of Port of Singapore Authority
International Pvt Ltd and South India Corporation Limited Logistics
during November 2006.

As per the draft license agreement, the licensee guarantees that the
project completion shall be achieved in accordance with the Market Snippets
provisions of the agreement on a date not later than 24 months from
the date of award of the license. Estimated FDI in RE sector in 2006 –
US$4 Bn
Snippets on a recent survey from FICCI Survey
Bank credit to the Real Estate
Sample: 24 leading real estate consultancy firms, developers, Sector during 2005 - 06, was
construction companies, builders and financial institutions Rs.2,60,223 crore against
Rs.1,45,605 crores during 2004 – 05
1. 67 per cent respondents did not foresee a sudden collapse in
As per CLSA, a foreign brokerage
the property prices
firm, over the next 5 years India will
need more than US$ 150 billion
2. 80 per cent of the respondents supported the view that rise in
worth of Houses
prices was perceived in the commercial and residential
segment of Tier-II cities.
In 2002, only 7 million sq. ft of office
space was built as against 30.4
3. 41% respondents said residential property is driven by
million sq. ft during 2006
speculation and 27% respondents felt it is demand driven
Various foreign Real Estate Funds
4. 8.3% felt that commercial property is driven by speculation
have raised US$ 8 Billion to invest in
and 75% felt it is driven by demand from end users.
India.
5. 90 per cent of the respondents felt IPOs would drive in higher
During the last 10 years, the
corporatisation, accountability and transparency. Close to 60
average age of Borrowers has
per cent of them believed that it would lend more credibility
come down to 43 years - 35 years
to the sector
and the average size of the loan
increased to 2 lakh - 10 lakh
 PAGE 4 CHANAKYA

Economic Snippets
Inflation Likely to come down…..?

Latest data shows that the inflation as on 15 February has climbed to

6.73% yoy. WPI inflation was last seen at these levels in December 2004.
Government has implemented various monetary measures to curb
inflation with no much result. In yet another measure the government
announced the cut in retail fuel prices from February 16. This is likely to
bring down the galloping inflation by 0.2%. The RBIS is also been
increasing the CRR in the view of reducing the money supply. Even
after these measures the inflation has been stabilizing and is refusing to
come down. So effectively the inflation is here to stay for at least in the
next three month.

Analysis

What will it do for us? The inflation will show its first effect on the rising
interest rate, especially on the home loan rates. The RBI will further
increase the CRR requirement which will force the banks to minimize
the credit exposure and increase the PLR rates. This will also force
banks to reduce their exposure to real estate markets as per the RBI
guidelines.

Economic Indicators
Forex Reserves

The forex reserve with the central banker was ruling at $187.21 billion as of
15 March 2007.
` This is an increase of over $5.3 billion over the week and is
expected to continue to rise and may touch $190 billion by the end of the
year.

As on 15.03.07 In 2003-04, India

received a total FDI
House Loan 10.25%
inflow of US$2.7 billion,
Rs./US $ rate 44.09 of which only 4.5% was
in RE, in 2004-5 this
6 month forward
increased to US$3.75
Premium 3.68%
billion 10.6%, in 2005-06
Forex Reserve $187.21bn it is US$5.46 billion and
16% of total and in
Bank Credit 29.6%
2006-07 the estimates
Deposits 23.2% show that US$8 billion
and26.5%
Money Supply (M3) 21%

IIP 11.1%

RE Sector 30% (aprox.)

The real estate investment in the over all FDI is been growing rapidly. In
2003-04, India received total FDI inflow of US$ 2.70 billion, of which only
4.5% was committed to real estate sector. In 2004-05 this increased to US$
3.75 billion of which, the real estate share was 10.6%. In 2005-06 it was
US$5.46 billion at 16% and in 2006-07 it is around US$8 billion and forms
26.5% of the total.
 CHANAKYA PAGE 5

BUDGET 2007 - 08
This is a moderate budget as far as its positive implications on the real
estate sector are concerned. The five-year tax holiday afforded to
Delhi, Gurgaon, Ghazi bad, Faridabad and NOIDA in context with the
upcoming Commonwealth Games will benefit those areas. This move
will pump in demand for property in these areas and therefore push
prices up.

The fact that service tax will be levied on commercial properties is

definitely a step backwards. It will cause the cost of lease rentals to
rise proportionately – another added burden that will be transferred
directly to the end users. The dual excise on cement is likely to push
up the input cost for the real estate industry which in turn will reduce
the margin and increase the cost.

The higher initiative to continue in public-private partnerships is

definitely encouraging. It will help maintain growth in the real estate
sector.

The $6 billion infrastructure fund formulated by the Deepak Parekh

Committee last year is being put into effect and this is nothing but
good news for the infrastructure industry. Investment in infrastructure
will become easier, helping to escalate infrastructure development.
This will obviously have positive repercussions on the real estate sector
as well.

The prospect of completion of all major undertakings associated with

the Golden Quadrilateral project by 2009 is extremely positive, since
this will enhance connectivity between metros and bring in a
considerably supply of land. New corridors will open up, and these will
be typified by affordable rates that will benefit end users. In fact, the
budget's thrust on rural infrastructure will escalate real estate
opportunities in areas that were hitherto neglected. Moreover, it will
lessen the movement or rural dwellers to urban areas, thus decreasing
the load on our already saturated cities.

The introduction of reverse mortgage and mortgage guarantee The fact that service tax
companies is positive in the budget, which will translate into direct
will be levied on
security for homeowners. Reverse mortgage is a special loan against
residential properties that allow for conversion a portion of the equity commercial properties
in such properties into cash. But unlike a traditional home equity loan, is definitely a step
line of credits or second mortgage, no repayment is required until the backward. This will
borrower no longer uses the home as principal residence.
cause the cost of lease
Because the budget denies Venture Capital Funds tax exemption to rentals to rise
all other than those investing in certain high-tech industries, there is proportionately.
now far less incentive to invest in real estate-related VCFs. This is a
serious limitation, considering that India has not yet adopted REITS as
vehicles for investment in real estate. Though denial of tax exemption
for VCFs is applicable only from the coming financial year, those
existing now will also be affected.

No regulatory provisions for controlling home loan rate are

announced. In other words, interest rates are still left to the market
and no provisions to guard against further escalations are in place.
However, the fact that the budget aims to exceed the yardstick of 15
lakh houses under Bharat Nirman Program is extremely good news
good for the low-cost housing sector. Corporates would now be
encouraged to invest in this sector, which will provide very healthy
profit margins after this new development.
PAGE 6 CHANAKYA

Events Team Chanakya

Real Estate Investment

World, Mumbai 23-25 Subramanyam
March 07 Head Strategic Planning
Ph: 044 2454 1111 (extn-304)
SPG Meeting 7 April 07
D.Joel K Pandian
EC Meeting TBC DGM-Strategic Planning
Ph: 044 2454 1111 (extn-306)

N.Gayathri
Secretary
Ph: 044 2454 1111 (extn-315)