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RESEARCH

March 2009
ECONOMY @ GLANCE
Knight Frank
Home Loan Rates
Economic Outlook 60 bps. (revised) in Dec'08 and 50 bps. in 12
Jan'09, is continuing to shrink. Further,
The health of the Indian economy is exports and imports declined by around 13%
11

deteriorating day by day despite large doses and 18% respectively in Feb'09 compared to 10
of medication. Thus, what is questionable same period last year.

Percent
now is not the adequacy of the medical 9

response, but the very diagnosis of the In early February, the UPA government's fiscal
8
disease. budget, without a single policy initiative or
tax incentive, served merely as a 7
The symptoms witnessed in the last month, campaigning tool for the upcoming Lok
6
namely the slowing growth, slackening trade Sabha election. The budget contained

Sep-04

Jun-05

Mar-06

Dec-06

Sep-07

Jun-08

Mar-09
and weakening currency, have augmented measures like higher allocation to the rural
concerns pertaining to the Indian economy. job guarantee scheme and rural SBI HDFC
GDP growth, which stood at 8.8% in infrastructure, and the extension of cheap
Source: HDFC, SBI

Q3 2007-08, declined to an unexpected 5.3% credit to farmers. The government raised the Of late, developers have started to reduce the
in Q3 2008-09, even while the doctors of funding for its National Rural Employment prices of their residential projects. Recently,
economic policy maintained a higher growth Guarantee Scheme, a scheme that will DLF slashed the prices of its upcoming 2,000
projection of 7.1% for the current financial provide some livelihood security to people in unit residential project in Bengaluru by 32%,
year. The negative growth of 2.2% in rural areas, from Rs.160 Bn. to Rs.310 Bn. and also cut rates of its 3,500 unit residential
agriculture, coupled with the degrowth of However, there was no mention of any project in Chennai by 17%, indicating the
0.2% in manufacturing, further highlighted scheme to tackle rising urban unemployment. current preference of developers for liquidity
the ongoing economic slump. The over higher profit margins. Liquidity is critical
government estimated growth of 7.1% for the The UPA government, soon after the budget, for developers due to the fact that sagging
current financial year would require the announced the third stimulus package for the demand for property and over-stretched
economy to grow by 7.6% in the fourth economy. The focal point of this Rs.300 Bn. balance sheets are making debt servicing
quarter, an improbable scenario given that package was the 2% cut in the service tax difficult. While other sources of funds like
external trade is decelerating, and the Index and excise duty. For the real estate industry, public issue and private equity have dried up,
of Industrial Production (IIP), which fell by the cut in excise on steel and cement the cost of debt for developers has increased
together will lower the construction cost considerably in the past two years. The cost
Inflation (Monthly Average)
14 marginally. However, for infrastructure for developers of bank borrowings, which was
12 projects, the benefit will be larger on account hovering around 10-12% per annum in the
of the higher proportion of cement and steel beginning of 2007, moved up to 15-17%
10
usage in such projects. The cut in service tax per annum in the middle of 2008, following
8
Percent

will marginally benefit the tenants of which it came down to 13-15% per annum
6 commercial office space through a reduction after the RBI reduced policy rates . Some
4 in lease rentals by approximately 2%. The developers have raised money through the
benefit of these cuts, however, will not be issuance of debentures with an interest cost
2
significant for the consumer, especially as we in excess of 24% per annum. This, however,
0
are already witnessing a sharp correction in has been for short tenures ranging from 1-4
Jul-08
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08

Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09

property prices. months. Credit rating downgrades for certain
CPI WPI developers has proved an additional obstacle
Source: Government of India
in their already difficult quest for financing.

India Research www.knightfrank.com
This report is published for general information only. Although high standards have been used in the
Samantak Das National Head - Research preparation of the information, analysis, views and projections presented in this report, no legal
+91 (022) 2267 0876 responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant
from the contents of this document. As a general report, this material does not necessarily represent the
samantak.das@in.knightfrank.com view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or
in part is allowed with proper reference to Knight Frank Research.
March 2009
ECONOMY @ GLANCE

Taking note of the fiscal slippage on account rates of 8.5% for home loans up to Rs.0.5 Mn.
Some developers have
of higher spending in the budget and sops and 9.25% for home loans between Rs.0.5 to
attempted to address low
offered in the third stimulus package, Rs.2 Mn. Public sector banks that are offering
residential demand by
Standard & Poor's downgraded India's the above schemes have been able to
offering residential
sovereign investment rating from stable to disburse only Rs.16 Bn., clearing 28,000 loan
property on rent for a
negative. This could adversely impact the applications across India in the first two
certain period, after which
ratings of the corporate sector, mainly the months from the launch of the scheme.
the buyer can exercise the
state owned companies and banks that enjoy
Even though home loan interest rates have option of buying it, with
near sovereign rating, thereby making
come down by approximately 300 bps., and the total amount of rent
borrowing costlier for the industry as a whole.
property prices have corrected over the last paid being adjusted against
The ratings downgrade could also adversely
impact the flow of foreign investment for
few months, the number of property the purchase price.
transactions has not increased. This is
various large scale projects. The rising fiscal
primarily due to lower confidence among Office Outlook
deficit and the subsequent sovereign rating
borrowers, who are facing employment The slump in India's office market is now well
downgrade have exerted further strain on the
uncertainties, and the unwillingness of banks documented. As the financial pressure on
already weak Rupee, which has depreciated
to lend due to rising delinquencies. Some firms has intensified, it has become
by a worrisome 30% in the current financial
developers have attempted to address this increasingly difficult to maintain rental levels
year till date. The exchange rate, which was
problem by offering residential property on more indicative of a robust market. The
hovering around Rs.40/USD at the beginning
rent for a certain period, after which the buyer country's office market has shifted to being
of the financial year, has touched a low of
can exercise the option of buying it, with the more tenant-driven due to the increasing
Rs.52/USD. This translates into a higher
total amount of rent paid being adjusted bargaining power of firms in these turbulent
liability in terms of dollar denominated
against the purchase price of property. times. Many troubled firms are looking to
overseas borrowings. Meanwhile, the data
Considering the buyer gets an option to renegotiate rentals, or at the very least have
from Venture Intelligence indicates that
occupy his desired property without creating rent escalation clauses waived, a factor that
private equity investment in India has
a fixed financial obligation, and the should ensure that rentals at best will remain
declined by over 50% to USD 6.6 Bn. during
developer is able to monetize his asset, this stagnant over the coming months. An
the Apr'08 to Feb'09 period.
kind of arrangement is mutually beneficial to example of the scale of the problem for
INR/USD Exchange Rate (Monthly Average)
55 35 both parties. India's office market today is that Credit
50 25 Suisse, a major global financial institution,
Amidst the slowdown in the economy's
45 15 has recently been looking to sub-lease a
growth, the thrust on infrastructure financing
40 5 section of space in Mumbai that had
INR / USD

through the refinancing provision by the India
Percent

35 -5 previously been earmarked for expansion.
Infrastructure Finance Company Ltd. (IIFCL) is
30 -15 Thus, it comes as no surprise that rentals in
gaining momentum. While the first two
25 -25 high-end office markets like Nariman Point,
stimulus packages provided for Rs.400 Bn.
20 -35 Lower Parel and Bandra Kurla Complex in
through tax free bonds, recently, the RBI has
0 0 Mumbai have declined. An equally worrying
released USD 250 Mn. to the UK subsidiary of
Jul-08
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08

Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09

trend is the rise in vacancy levels in these
the company. The RBI's release of funds
micro markets, and indeed across the
INR/USD (LHS) Annual Appreciation/(Depreciation) (RHS) would be used partially to finance the import
Source: Government of India
powerhouse office markets of Mumbai and
of capital goods by Indian companies in the
the NCR, where vacancy levels more than
In its effort to revive sagging growth, the RBI infrastructure sector. Meanwhile, the cut in
doubled from Q4 2007 to Q4 2008. The
continued to cut the policy rates, with the interest rate, excise duty and focus on rural
recent trends observed in rentals and
repo and reverse repo rate both being growth by the automobile industry has
vacancy can be expected to at best persist,
reduced by 50 bps. in Mar'09. While the helped it achieve strong growth in Feb'09.
particularly as absorption and pre-leasing
declining inflation rate, which touched a low The revised estimates of IIP growth from -2%
activity will remain subdued as long as
of 2.43% in the last week of Feb'09, provided to -0.6% in Dec'08, and the strong growth of
companies continue to reel under the impact
some leeway to RBI to reduce policy rates, the 15.4% in the capital goods segment of the
of the global financial crisis
impact of lowered interest rates is yet to tell. Jan'09 IIP numbers, exude positive signs.
The Indian Banks' Association (IBA) data on Though these developments will not The extent of the slump afflicting the office
housing loan disbursals highlighted the weak eradicate the disease, they will certainly help market has become increasingly evident in
response generated by the special interest the Indian economy to recuperate. the recent actions of major developers.

India Research www.knightfrank.com
This report is published for general information only. Although high standards have been used in the
Samantak Das National Head - Research preparation of the information, analysis, views and projections presented in this report, no legal
+91 (022) 2267 0876 responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant
from the contents of this document. As a general report, this material does not necessarily represent the
samantak.das@in.knightfrank.com view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or
in part is allowed with proper reference to Knight Frank Research.
March 2009
ECONOMY @ GLANCE

The major players are now slowly but surely The following graphs show the trend in office Residential Market: Current
realizing the pressing need to restructure and rentals in Mumbai and NCR in the form of
realign projects to weather the current indices with the base period as May '06. Affairs
financial turbulence. A number of developers Mumbai Office Rental Index
300
whose hands are tied by a lack of financing Mumbai Cluster Development

Index value (Base: May '06=100)
options are either stalling or phasing out 250
The newly modified Development Control
current projects, and postponing future 200 Regulation 33(9) (DCR 33(9)), passed by the
projects. For instance, in February, Unitech
cabinet of the Government of Maharashtra on
150
dropped plans to develop two IT Parks,
the 25th February, 2009, and aimed at
amounting to 8.3 mn.sq.ft. of commercial 100 facilitating the cluster redevelopment of
space, in Gurgaon and Noida in the NCR.
50 dilapidated buildings, has attracted
This is understandable considering that
considerable controversy. The primary point
Unitech has until now managed to obtain 0
of debate is the stipulation contained in the
May-06
Jul-06
Oct-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Feb-09
pre-leasing commitments for barely 30% out
DCR 33(9) that makes it compulsory to obtain
of a total of 13.1 mn.sq.ft. of IT Park space
Fort/Ballard Estate Worli/Prabhadevi Lower Parel the permission of 70% of the property
currently under construction. Indeed, due to BKC/CST Road Malad-Mindspace
owners, in addition to 70% of tenants, in a
the decline in India's IT sector, developers Source: Knight Frank Research
NCR Office Rental Index
cluster of minimum one acre in order to
such as Unitech and Parsvnath are now 300
proceed with redevelopment plans. Although
shifting their focus to the construction of
the DCR 33(9) does provide incentive to
Index value (Base: May '06=100)

250
non-IT space, which would also prove a
developers by raising the FSI from 2.5 to 4.0,
cheaper alternative due to the smaller space 200
and to the tenants by raising the flat area
requirement for such project types. This is
150 from 225 sq.ft. to 300 sq.ft., it is widely
reflected by the fact that whereas earlier,
perceived that providing property owners the
100
most big developers did not cater to demand
option of declining involvement in the
below 2,000 sq.ft., today, they are even 50 scheme might prove a deterrent. This is so
willing to serve space requirements of as
0
because the property owners in question
little as 500 sq.ft. DLF, another prominent
have, owing to rent control regulations,
May-06
Jul-06
Oct-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Feb-09

developer, as of February had halted
witnessed generations of the same family
construction of nearly 12 mn.sq.ft. out of a Connaught Place Okhla Industrial Area
occupying these dilapidated flats at absurdly
Gurgaon Noida Bhikaji Camaji Place
planned 36 mn.sq.ft. of office space. Omaxe
Source: Knight Frank Research
low rents based on outdated rates.
and Indiabulls have also announced the
The following tables list the top office Redeveloping these flats would promote the
delay of certain office projects in both
micro-markets in Mumbai and NCR in terms of continuation of such archaic tenancies, a
Mumbai and the NCR. Knight Frank Research
rental decline observed from Dec'08 to scenario that the aforementioned property
projects that from 2009-11, estimated supply
Feb'09. owners would be staunchly against given
of Grade A space will exceed incremental
their desire to lease these flats out to fresh
demand for the same by 81% and 40% in NCR Mumbai Micro Market Dec'08-Feb'09
Rental Decline tenants at current market rates. It is believed
and Mumbai respectively. Given this, it is
Malad - Mindspace -21% that decisions pertaining to such
entirely conceivable that developers, Navi Mumbai -15% redevelopment schemes should be left
cognizant of the likelihood of such a Andheri (E) -12% largely to tenants occupying these flats, as it
scenario, will continue to tread with caution. Nariman Point -8%
is these tenants who have had to live with the
Rentals can be expected to decline further in BKC / CST Road -7%
Fort/Ballard Estate -6% risk and discomfort of severely dilapidated
the face of declining absorption, which in
Worli - Prabhadevi -5% flats believed to be in excess of 30,000
turn will force developers to continue to Lower Parel -4% around the island city.
restructure and realign projects to avoid the Source: Knight Frank Research
accumulation of vacant stock. Another concern pertaining to the DCR 33(9)
NCR Micro Market Dec'08-Feb'09
Rental Decline surrounds its widening of the scope of the
DURING THESE TURBULENT TIMES,
THE OFFICE MARKET HAS EVOLVED Okhla Industrial Area -11% redevelopment scheme, as outlined in the
TO BECOME MORE TENANT DRIVEN Gurgaon -9% DCR 33(7), to include, in addition to cessed
AS FIRMS SEEK TO RENEGOTIATE Nehru Place -4%
buildings, government and private buildings
RENTALS or at the very least Connaught Place -4%
constructed before 1969 and declared
have rent escalation clauses Bhikaji Cama Place -4%
waived Noida -2% dangerous.
Source: Knight Frank Research

India Research www.knightfrank.com
This report is published for general information only. Although high standards have been used in the
Samantak Das National Head - Research preparation of the information, analysis, views and projections presented in this report, no legal
+91 (022) 2267 0876 responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant
from the contents of this document. As a general report, this material does not necessarily represent the
samantak.das@in.knightfrank.com view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or
in part is allowed with proper reference to Knight Frank Research.
March 2009
ECONOMY @ GLANCE

As a large number of heritage structures at Naturally, the main hardship concerning such The following tables list the top residential
Fort and Marine Drive for example would fall an initiative is the coordination of the entire micro markets in Mumbai and NCR in terms of
within this scope, there is a concern that the process. The TAG of the RBI recommended price decline observed between Dec'08 and
DCR 33(9) might detract from the heritage setting up a Standing Committee to initiate Feb'09.
appeal of real estate around Mumbai. the process, chart its progress and over time
increase its scope. It has also recommended Mumbai Micro Market Dec'08-Feb'09
Unfortunately, owing to the above discussed Price Decline
that the National Buildings Organisation
two factors, it appears that the DCR 33(9), Bandra (W) -11%
(NBO), Ministry of Housing and Urban Poverty Worli ( Grade B) -10%
despite its intent to ameliorate and facilitate
Alleviation of the Union Government be Worli (Grade A) -8%
the redevelopment initiative in Mumbai, will Powai -5%
involved in coordinating the collection of
in fact create new obstacles. Several Central Mumbai
housing permit data in surveyed locations.
organisations, the Remaking of Mumbai (Parel, Sewri, Byculla etc) -5%
Despite the anticipated difficulties, the
Federation (RoMF) being an example, are Thane -4%
framework has been put forth for a model that Source: Knight Frank Research
prepared to undertake any legal measures
if realised, would augment the depth and
necessary to ensure primary consideration of NCR Micro Market Dec'08-Feb'09
accessibility of housing demand and supply
the affected tenants' prerogatives. Therefore, Price Decline
data in India.
further initiatives need to be undertaken in Greater Kailash I & II -16%
order to bring the three parties involves, New Friends Colony -16%
The following graphs show the trend in Greater Noida -6%
namely the developers, tenants and property
property prices in Mumbai and NCR in the Chanakyapuri -2%
owners, onto the same page. Gurgaon (Grade A ) -1%
form of indices with the base period as
May'06. Source: Knight Frank Research
Housing Index
Mumbai Residential Price Index
At the start of this month, a Technical 300 Rentals can be expected to
Advisory Group (TAG) of the Reserve Bank of decline further in the face
Index value (Base: May '06=100)

250
India (RBI) recommended the compilation of a of declining absorption,
Housing Start-Up Index (HSUI), which will be 200
which in turn will force
based on newly built residential units in 150 developers to continue to
urban locations across India. Post restructure and realign
100
liberalisation, the RBI only looked at equity projects to avoid the
prices in order to track asset price inflation. 50
accumulation of vacant
However, the growing significance of India's
0 stock.
real estate sector has necessitated closer
May-06
Jul-06
Oct-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Feb-09

consideration of real estate prices. The
proposed index would be compiled on a South Mumbai (Grade A) Goregaon to Borivili
Vashi Mulund Powai Sion/Chembur
quarterly basis, and would be based on
Source: Knight Frank Research
start-up coefficients that would depict the
relationship between housing permits and
NCR Residential Price Index
housing starts in the six metros over the past 300

two years. The logic behind this methodology
Index value (Base: May '06=100)

250
is that the relationship between permits and
starts serves as a good indicator of the 200

housing demand and supply dynamic in a 150
particular location. Housing permits are
100
issued to authorise construction for new
residential units, and could thus be 50

considered a proxy for housing demand,
0
whereas housing starts reflect the share of
May-06
Jul-06
Oct-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Feb-09

such permits that translate into actual
construction, thus being a good proxy for Greater Kailash I & II Ghaziabad Gurgaon
Noida Greater Noida East Delhi
housing supply.
Faridabad
Source: Knight Frank Research

India Research www.knightfrank.com
This report is published for general information only. Although high standards have been used in the
Samantak Das National Head - Research preparation of the information, analysis, views and projections presented in this report, no legal
+91 (022) 2267 0876 responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant
from the contents of this document. As a general report, this material does not necessarily represent the
samantak.das@in.knightfrank.com view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or
in part is allowed with proper reference to Knight Frank Research.