Real Estate Intelligence Service

Indian Real Estate Market 4Q 2011

State of the Retail Sector
A net increase of 12 million sq ft in retail space is expected in 2012 Retail space in India witnessed a phenomenal increase of 13.8 million sq ft as 34 malls got operational in the year of 2011, led by Mumbai and NCR-Delhi which added 3.6 million and 3.3 million sq ft each. 2012 is expected to add another 12 million sq ft of space to organized retail sector. Vacancy was recorded at 20.2% in 4Q11 falling 1.2% from 21.4% in 3Q11 With more completions over the next three years, vacancy at a Pan-India level is expected to shoot up and peak at 24.9% in 2014; with vacancy in NCR-Delhi touching 32.1% and the same in Bangalore is expected to be around 22.2%. Rental values increase in four out of seven top cities of India Rental values saw an increase in 4Q11 in retail markets in NCR-Delhi, Mumbai, Pune and Kolkata. Rental values in Mumbai witnessed an increase of 2.9%. More international retailers to venture into India Polarisation of Supply and Demand for Retail Space

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State of the Retail Sector

The year 2011 witnessed the completion of shopping centres across tiers of geography and segments including value, lifestyle, speciality and luxury. A total of 13.8 million sq ft of retail space across 34 retail malls in the top seven cities became operational during 2011. While Tier III cities will only witness value and necessity retailing, Tier I and Tier II cities will continue to see lifestyle and luxury retail offerings. Persistent high core-inflation coupled with lowering of GDP growth forecasts for 2012-13 is likely to hamper consumer spending in the coming quarters. The absorption forecast for 2012 has revised downward to 8 million sq ft of retail space, of which 3.3 million sq ft is already pre-committed in malls expected to become operational during 2012. Retailers in cities like Hyderabad, Chennai and Bangalore continue to actively lease at high streets due to the unavailability of new upcoming operational malls and low vacancy in prime operational malls. While further postponement of the decision to allow FDI in multi-brand retailing has been shunned by investors, the passing of regulation to allow 100% FDI in single brand retailing has received a mixed response from international retailers given the local sourcing clause. Delhi and Chennai are expected likely to witness completion of 2.0 million sq ft of retail space each in 2011. The expected supply in 2011 is at advanced stages of construction with 48% of the supply ready for fit-outs, with NCR-Delhi alone accounting for 5 malls out of a total of 18. 36% of the retail space in projects in ready for fit-outs stage is precommitted to retailers. About 5.0 million sq ft of retail space expected to become operational in 2012 is under the stage 50-100% structure ready (Figure 2).

13.8 million sq ft of retail space became operational in 2011 4Q11 witnessed completion of 3.7 million sq ft of retail space across eight malls in Indian cities. Two notable projects that became operational were Market City in Kurla, Mumbai and Market City in Bangalore by Phoenix. Chennai and Hyderabad witnessed no completion of mall space in 4Q11. 12 million sq ft of retail space encompassing 35 malls is expected to become operational in the 2012, led by Mumbai which is expecting 2.6 million sq ft (Figure 1). Both NCR-

Figure 1: Supply, Net Absorption and Vacancy of Retail Space in India

24 36%

Completions / Absorption (million sq ft)

20 17.2

30%

16 13.8

24% Vacancy (%)

12.0

12 9.4 9.6

18% 9.5 10.6 12% 7.6 6% 0% 2014

8.5

6.6

4.1 3.7

0 2005 2006 2007 2008 2009 2010 2011 2012 2013

3.8 2.8

New Completions

4.0

Net Absorption

4.0

6.3

6.9

Note: Figures are representative of Indias seven metropolitan cities NCR-Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata and Pune Source: Real Estate Intelligence Service (JLL), 4Q11

8.0

9.7

Vacancy

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Figure 2: Construction Status of Future Supply (2012-2014)

100% 90% Stages of Construction for Expected Supply 80% 70% 60% 50% 40% 30% 48% 20% 10% 0% 2012F 2013F 2014F 45% 21% Completed 44% 42% 35% Less than 50% Structure Ready 50-100% Structure Ready 8% 16% 35% Excavation / Upto Plinth Proposed 5%

Ready for Fit-Outs

Note: Figures are representative of Indias seven metropolitan cities NCR-Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata and Pune Source: Real Estate Intelligence Service (JLL), 4Q11

Hence, 90% of the annual supply of 2012 is under relatively advanced stages of construction and the likelihood of completion of these projects is very high. However, some non-performing retail malls might get delayed or get converted to grade B retail stores and commercial complexes. At end-4Q11, NCR-Delhi and Mumbai together constitute 65% of the total retail space in India, housing 145 of the 234 malls currently operational in the country. Bangalore has a retail stock of 6.8 million sq ft, followed by Pune, Kolkata, Hyderabad and Chennai. With the completion of six retail malls during 2011, the Pune retail market has witnessed a remarkable transformation, with its retail stock increasing to 4.7 million sq ft. Against all India supply of 2012, net absorption of 8.0 million sq ft is projected for 2012, led by Mumbai and Pune each is expected to absorb 1.6 million sq ft. 2.2 million sq ft is precommitted in malls expected to become operational during

the first six months of 2012. Of the retail malls that are under construction and are expected to become operational in 2012, high pre-commitment levels (more than 60%) have been observed in projects of Pune. Large spaces have been signed by anchor retailers and large format stores in these cities. Vacancy was recorded at 20.2% in 4Q11 falling 1.2% from 21.4% in 3Q11 Vacancy at a Pan-India level was recorded at 20.2% in 4Q11 falling by 1.2% from 21.4% in 3Q11, with NCR-Delhi at a high vacancy of 26.3%, followed by Mumbai at 22.7% (Figure 3). With more completions in the next three years, vacancy at a Pan-India level is expected to shoot up and peak at 24.9% at end-2014, with vacancy in NCR-Delhi touching 32.1% and the same in Bangalore is expected to be around 22.2%.

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Figure 3: Stock-Vacancy in Various Cities (4Q11 vs 4Q12F)

30

25

Stock (million sq ft)

20

NCR-Delhi NCR-Delhi Mumbai

Mumbai 15

10

Bangalore Bangalore Hyderabad

Hyderabad Pune Kolkata Kolkata Pune Chennai

Chennai 10% 15% 20% Vacancy (%) 25% 30% 35% 40%

0 0%

5%

Note: Darker circles indicate stock-vacancy position at end-4Q11 and lighter circles indicate positions at end-4Q12F per forecasts. Source: Real Estate Intelligence Service (JLL), 4Q11

Figure 4: Simple Average of Quarterly Change in Rental Values across Markets

-5% -4% -3% -2% -1% 0% 1% 2% 3% Simple Average of % Q-o-Q Change in Rental Values 4% India Kolkata Hyderabad Pune Chennai Bangalore Mumbai NCR-Delhi
NCR-Delhi 4Q11 3Q11 2Q11 1Q11 4Q10 3Q10 2Q10 0.9% 1.3% 1.6% 0.7% 0.0% 0.0% -3.9% Mumbai 2.9% 1.8% 2.4% 0.0% 0.0% 0.0% 0.0% Bangalore 0.0% 1.3% 3.5% 0.0% 0.0% 0.0% 0.0% Chennai 0.0% 0.0% 0.0% 2.4% 0.0% 0.0% 0.0% Pune 1.1% 1.6% 1.3% 0.9% 2.4% 0.0% 0.0% Hyderabad 0.0% 0.0% 0.0% 0.8% 0.0% 0.0% 0.0% Kolkata 2.4% 0.6% 0.7% 0.9% 0.0% 0.8% 0.0% India 1.0% 0.9% 1.4% 0.8% 0.3% 0.1% -0.6%

4Q11 3Q11 2Q11 1Q11 4Q10 3Q10 2Q10

Note: City level q-o-q rental value change is calculated by taking a simple average of the %q-o-q change of rental values in the constituent micro-markets Source: Real Estate Intelligence Service (JLL), 4Q11

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subdued. Walmart and the likes have yet again been held back from entering India with their chain of B2C retail stores. Allowance of a majority FDI stake in multi-brand retailing is essential to meet the capital needs of the retail industry, especially the logistics infrastructure. Polarisation of Supply and Demand for Retail Space Retailers have learned from the past mistakes of unplanned growth and are now focused on expanding only through those malls that attract higher footfalls and have a healthy footfall-to-sales conversion ratio backed by desirable attributes such as a good location, a lease-only model, an experienced developer profile, a professional mall management team and active tenant mix management. Poor quality malls, on the other hand, will continue to struggle with higher vacancy in the short to medium term as they fail to garner retailer interest. This demand polarisation is so stark that retailers are willing to pay a significant premium to lease space in well performing, premium retail assets. With vacancy in premium operational projects in single digits, and a dearth of high quality upcoming mall supply in Tier 1 cities of NCR-Delhi, Mumbai and Bangalore the rental and absorption variance in Grade A versus Grade B malls is expected to further exacerbate. Some big format retailers are already looking towards standalone stores on high streets given that space in premium retail malls is not available.

Rental values increase in four out of seven top cities of India in 4Q11 Rental values saw an increase in 4Q11 in retail markets in NCR-Delhi, Mumbai, Pune and Kolkata. (Figure 4). Rental values in Kolkata and Mumbai witnessed an increase of 2.4% and 2.9% respectively. Increase in average rents in partly attributed to quality malls becoming operational in these cities as well as increase in the prime malls at central locations. Through 2010 and 2011, several retailers demanded renegotiation on rentals and preferred revenue sharing models. While the terms of revenue sharing have made the landlord accountable for generating footfalls in the mall, it rewards them by reducing the risk of near term vacancy and retasining probabilities of better revenues in the future. Typical revenue share models in malls vary for different categories of retailers - Hypermarkets (3.5-4.5%), Anchor (7-9%), Vanilla (9-18%), Electronics (3-3.5%) and Food & Beverages (12-25%). More international retailers to venture into India In 2006, Government of India allowed upto 51% Foreign Direct Investment (FDI) into single brand retailing, as a measure to liberalise the retail sector. The conditions included that the products sold should only be of a single brand, which is sold under the same brand internationally, and single brand product-retailing would cover only products which are branded during manufacturing. In 2008, the sector was further liberalized when the government permitted 100% FDI under the automatic route for wholesale or cash-andcarry trading. Indian economy faces serious supply-side constraints, particularly in the food-related retail chains. The argument against opening of the retail sector has been that once foreign retailers open up their stores in India, it would amount to unfair competition to small domestic players. This would in turn lead to large scale exit of domestic retailers causing displacement of people employed in the retail sector. Recently, the Indian government passed the much needed regulation to allow 100% FDI in single brand retailing albeit with a clause of 30% mandatory sourcing from Indian SMEs. This move has received mixed reaction from international retailers. While Starbucks has finally announced to enter India and open upto 50 stores by end-2012, IKEA, the Swedish furniture retailer, is not happy with the local sourcing clause. An earlier initiative mooted by the government to allow 51% FDI in multi-brand retailing saw countrywide political protests which resulted in the pullback of the decision. Now, although, Indian government continues to project that it will eventually allow FDI in multi-brand retailing, enthusiasm among foreign investors and retailers alike is

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India Tier I Bangalore Chennai Delhi Mumbai

India - Tier II Hyderabad Kolkata Pune

India Tier III Ahmedabad

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