RESEARCH

April 2009
ECONOMY @ GLANCE
Knight Frank
Imports are growing, but at a slower pace, Inflation (Monthly Average)
Economic Outlook 14
which is due not only to falling petroleum and
The recently elapsed financial year witnessed 12
other commodity prices, but also to waning
major developments on the global economic demand in the domestic economy. Although 10

front. While the turn of the global economic this is a bad sign for producers, the silver 8

Percent
cycle was confirmed at the beginning of lining is that the deteriorating trade deficit is 6
FY 09, the impact of the slowdown, which being kept in check.
dragged major economies of America and 4

Europe into recession, was reflected by The decline of inflation, which fell from 2
various indicators. The Indian economy's 12.91% in Aug'08 to 0.26% in Mar'09, has
0
growth forecast of 7.1% for FY 09 represents raised fears of deflation. This prospect is

Jan-09
Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Mar-09
the lowest growth rate for the last 6 years. worrisome because it discourages producers
A heightened sense of fear generated by a from continuing with their capacity utilisation CPI WPI
Source: Government of India
rising fiscal deficit and withdrawal of dollars and calls into question the feasibility of new
by foreign investors took its toll on the projects, which facing the threat of declining
WPI Inflation (with constituents)
currency. The Rupee weakened during the revenues could be stalled. Lower capacity 20

fiscal year, and depreciated 28% from utilisation may result in unemployment and
15
Rs.40/USD in Apr'08 to Rs.51/USD in Mar'09. could further dampen the labour market, a
scenario that could cause yet more damage 10
The Index of Industrial Production (IIP)
Percent

decelerated 0.5% year-on-year in Jan'09 to flagging demand and drag the economy 5
compared to 6.2% growth during the into a slump. However, it is important to note
0
previous year. Exports for FY 09 grew at 3.6%, that this deflation would not result from a real
the slowest pace in 7 years, and markedly fall in demand, but on account of lower -5
lower than the 29.08% growth witnessed last petroleum prices this year as compared to the
-10
year. Exports for FY 09 stood at USD 169 Bn., previous year. This phenomenon is evident in
Jan-09
Jan-08

Feb-08

Apr-08

May-08

Jul-08

Sep-08

Oct-08

Dec-08

Mar-09

short of the commerce ministry's revised the numbers for the last week of Mar'09,
target of USD 175 Bn., and significantly lower when although WPI inflation was at a WPI Primary articles Fuel & Power
than the initial target of USD 200 Bn. marginal 0.26%, the index for primary Manufactured Products
Source: Government of India
articles, for example food grains, which has a
GDP Growth weight of 22% in the WPI index, increased by
11 Crude Oil Prices
160
3.46%. Similarly, the index for manufactured
10
products, which constitutes a weight of about 140
9
64% of the WPI, increased by 1.42%. 120
8
However, the index for fuel & power,
USD per Barrel

100
Percent

7
comprising 14% of the WPI index, declined by 80
6 6.11%, thereby forcing down the WPI. The fuel 60
5 and power index decline can be attributed to 40
4 the fact that crude oil, which was trading at 20

3 USD 100 per barrel in Mar'08, is currently 0

Q1 FY 09
Q1 FY 07

Q2 FY 07

Q3 FY 07

Q4 FY 07

Q1 FY 08

Q2 FY 08

Q3 FY 08

Q4 FY 08

Q2 FY 09

Q3 FY 09

trading at USD 50 per barrel, which

Mar-07

Aug-07

Jan-08

Jun-08

Nov-08

Apr-09

represents a price level last seen in 2005.

Source: Energy Information Administration,US Government
Source: Government of India

India Research 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.
April 2009
ECONOMY @ GLANCE
Crude oil prices peaked at USD 146 per barrel
in Jul'08, pushing the WPI index to a peak of
12.91% in the second week of Aug'08. This
higher base of last year will lead to deflation
in the coming months. At the same time, the
CPI measure of inflation as of Feb'09 is
9.63%, reflecting rising consumer prices.
While lower inflation allowed the RBI to
reduce policy rates, thereby bringing down
interest rates in the economy, these reduced
interest rates have not actually translated to
higher credit growth. In fact, the growth of
outstanding non-food credit of the banking
sector has been declining in the last 6
months. The annual growth of around 38%
witnessed in Oct'08 has declined to around
24% in Mar'09. Credit offtake slackened
towards the last quarter of 2008 as key policy
rates peaked in Sep'08, when the repo rate
and CRR touched 9%, and the reverse repo
rate hit 6%. Since then, the apex bank has
consistently lowered policy rates to stimulate
the economy, bringing down the repo rate
and CRR to 5% each, and the reverse repo
rate to 3.5%.
Banks' Non Food Credit Outstanding Growth (Year-on-Year)
40
35
30
Percent
25
20
15
10
May-08
Jul-08
Source: Reserve Bank of India
10
8
6 customer exits will severely strain the
Percent
4 retailers today are exerting downward
2 strategies to combat the slump. During the
0
Jun-06
Sep-06
Dec-06
Mar-07
Repo
Source: Reserve Bank of India
India Research
Samantak Das National Head - Research
+91 (022) 2267 0876
samantak.das@in.knightfrank.com
To maintain asset quality, banks are adopting
a cautious approach towards lending. Non
Performing Assets (NPAs) of the banking
sector could increase in the coming months if
the economic situation continues to worsen.
This prospect is backed by the large number
of loan restructuring proposals that flooded
banks till March 31, 2009. The Union Bank of
India alone received around 100,000 loan
accounts for restructuring. The State Bank of
India and Bank of India together have
restructured over 50,000 loan accounts.
A large number of these proposals have come
from Small and Medium Enterprises (SME)
and other small borrowers. June 30, 2009 is
the date until which the Reserve Bank of
India's (RBI) guidelines allow restructuring of
loans to be classified as standard assets.
While several banks have reduced their Prime
Lending Rates in the last month, financing to
the real estate sector continues to remain
subdued. The Loan-to-Value (LTV) ratio for
property has come down to 50-60%.
Additionally, before lending, banks now want
a pre-commitment for 30-40% of the
development. The execution of several
projects has been delayed, and announced
projects have been stalled because of a lack
of liquidity in developers' hands. With other
sources of funding for developers drying up,
and money blocked in land and unfinished
projects, customer advances have become
important for the completion of projects.
However, on account of declining demand,
such advances are drying up. If anything,
customers are exiting from sold out projects.
Sep-08
Nov-08
Jan-09
Mar-09
Recently, after the delay in commencement of
construction, customers in DLF's New Town
Policy Rates Height project in Gurgaon expressed their
desire to exit the project and demanded a
refund. Considering the 3,300 apartment
project has been 90% sold out, such
developer's liquidity.
Developers have adopted certain coping
last 2-3 months, they have been successful in
selling residential projects at prices 20-30%
Dec-07
Jun-07
Sep-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
less than market rates. For instance, HDIL's
Reverse Repo CRR and Lodha Group's recently launched
This report is published for general information only. Although high standards have been used in the
preparation of the information, analysis, views and projections presented in this report, no legal
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
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.
residential projects in Mumbai received good
responses on the back of considerably
discounted rates. The recent sales of hotel
properties and land plots by developers
represent an effort to generate cash to
finance ongoing projects. While acquiring
large land reserves for future projects was
what all developers were focusing on in the
last few years, execution and completion of
ongoing projects has now become the
overriding priority.
Retail Market Outlook
The landscape of India's retail sector has
been dramatically altered by the ongoing
financial crisis. Less than a year ago, the
outlook for this sector exuded confidence.
The penetration of organised retail was
expected to rise from 5% currently to 16% by
2012. Similarly, investment in organised retail
was expected to touch USD 25 billion over the
next 4-5 years. However, recently, bullish
sentiments have given way to a cautious and
consolidative approach as India's retail
sector continues to be undermined by
declining sales and consumer demand.
Overall sales growth in Dec'08 was 11%,
compared to 35% the year before.
Consequently, the Retailers Association of
India (RAI) has slashed its growth forecast for
FY 09 from 30-35% to 15-20%.
The main problem facing retailers around the
country is that rent as a percentage of sales is
increasing due to the decline of the latter. A
generally accepted value for this ratio is
3-4%. However, on average, retailers are now
paying 12-20% of sales in rentals. Even a
major retailer like Reebok, which has been
paying 10% for the past three years, is now
paying 25%. Declining sales volumes
particularly damage small format shops,
which faced with such a scenario run the risk
of incurring operational losses. Thus,
pressure on rentals. For example, Samsonite
has renegotiated rentals for several stores
down by 15-20%, and in some cases by as
much as 50%. Recently, Biba, a women's
fashion retailer, renegotiated the rent for its
Navi Mumbai store down by 50%.
KnightFrank.com
April 2009
ECONOMY @ GLANCE
Future Group and Aditya Birla Retail are
examples of prominent retailers who are
seeking to reduce rental costs.
Zero rental schemes and revenue sharing
models are options that are proving
increasingly attractive to retailers looking to
trim costs, and to property owners seeking to
maintain occupancies. For example, Kimaya
Studio, a premium fashion chain, has
received 2-3 year zero rental offers from malls
in Hyderabad, Kolkata and Chandigarh.
Revenue sharing models are based on the
premise that rent paid is linked to store
performance. Several retailers, for example
Pantaloon, are attempting to negotiate a
combination of zero rentals and revenue
sharing agreements, whereby a period of zero
rentals will be followed by revenue sharing
for a duration until sales volumes begin to
rise again.
In addition to the short-term measure of
renegotiating rent, retailers are also looking
at longer-term initiatives in order to trim costs
and diversify risk. Certain brands are looking
to explore relatively untapped or growing
segments in order to diversify their range of
products. For example, in January, Raymond
Apparel, which has recently been recording
30% year on year growth, announced plans to
exploit the growing men's accessories
segment through the launch of 100 new
stores under its new chain Neckties & More.
Similarly, Reliance, through its
non-vegetarian retail chain Delight, is aiming
to exploit a segment in which organised retail
has thus far been relatively scarce due to
supply chain and processing issues. Delight
plans to open 50 new stores in the next 3
months, 500 by the end of this calendar year
and 1,000 by the end of 2010. The supply
chain is a segment of operations where many
retailers feel costs can be trimmed. For
example, RPG Retail is looking to tie up with
vendors to enable direct supply to their big
Spencer's stores, thus cutting down
warehousing costs. Several retailers have
been consolidating operations by reducing
their number of outlets. For example, since
Sep'08, Aditya Birla Retail has closed around
50 stores, and Foodland Fresh, a Mumbai
retail chain, recently shut 39 of its 42 outlets.
India Research
Samantak Das National Head - Research
+91 (022) 2267 0876
samantak.das@in.knightfrank.com
As mentioned earlier, the retail sector in India number of scheduled projects in this micro-
is witnessing landscape changes. Once the market have failed to launch. The following
phase of damage control and consolidation is graphs show the trend in retail rentals in
over, significant new trends could well begin Mumbai and NCR in the form of indices with
to emerge across the board. Retailers are the base period as Sep'06.
expected to shift focus to food retail and
consumer goods, rather than lifestyle goods.
In addition to this, Tier II and III cities could Mumbai Retail Rental Index
250
become more attractive propositions due to
lower rentals and operating costs. Developers
Index Value (Base: Sep'06=100)
200
such as DLF, which has recently halted
construction of 16 mn.sq.ft. of retail and 150
office space primarily in Tier 1 cities, would do
100
well to acknowledge the potential of alternate
locations and align themselves with
50
anticipated new trends. For all the talk of the
future though, the inescapable reality is that 0
Dec-07
Sep-06
Nov-06
Jan-07
Mar-07
Jul-07
Sep-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
sales volumes across the retail sector are
expected to continue declining as long as
Nariman Point Worli-Prabhadevi
aggregate demand in India continues to be
Lower Parel Andheri
stifled by the global economic crisis. Haji Ali / Kemps Corner Linking Road
Source: Knight Frank Research
A closer look at rental movement between
Q1 2008 and Q1 2009 suggests that the retail NCR Retail Rental Index
350
sector decline started with the financial
300
Index Value (Base: Sep'06=100)
crisis, which began a year ago, and has since
intensified. In Bengaluru, during the past 250
year, the rental declines observed ranged 200
from 14% in Indira Nagar and Jayanagar to
150
46% in Commercial Street. Brigade Road,
100
Malleshwaram and Koramangala all recorded
declines in the vicinity of 30%. In Hyderabad, 50
the declines observed were steeper, ranging 0
Sep-06
Nov-06
Jan-07
Mar-07
Jul-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
from 16% in Somajiguda to 42% in
Madhapur. Begumpet, Ameerpet, Banjara
Connaught Place South Ex Ghaziabad
Hills, Panjagutta and Jubilee Hills all recorded
Greater Noida GK II Gurgaon
rental declines of approximately 40% during Source: Knight Frank Research
the past year. The Chennai and Kolkata retail
markets appear to have been relatively less
impacted by the financial slump over the past
Residential Market Glance
year. The rental declines observed in Chennai Capital rates in residential markets across the
during this period range from 9% in Besant country continued to decline through Q1 2009
Nagar and Pursawaikam to 33% in Adyar. The as developers offered discounted rates in
prominent markets of Radhakrishnan Salai, order to push through sales prior to the end
Anna Salai and Nungambakkam High Road of the financial year. Liquidity constraints on
exhibited rental declines of 24%, 19% and the consumer side, and a lack of financing on
12% respectively. The Kolkata market thus far the supply side , will continue to depress
appears to have weathered the storm better residential prices. The following tables list
than most, and the greatest observed decline the top 6 micro-markets in Mumbai and NCR
of about 10% during the past year occurred in in terms of price decline during Q1 2009
the New Town (Rajarhat) micro-market. This relative to the peak rate observed during
decline was primarily due to the fact that a 2007-08.
KnightFrank.com
This report is published for general information only. Although high standards have been used in the
preparation of the information, analysis, views and projections presented in this report, no legal
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
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.
April 2009
ECONOMY @ GLANCE

Mumbai Residential 2007-08 Peak to FDI in Real Estate amendment to FDI norms that will eliminate
Micro-Market Q1 2009 Price the distinction between holding companies
Decline At a time when the government of India is and holding-cum-operating companies
Goregaon to Borivili -50% making a conscious effort to promote FDI, any
Central Mumbai -49%
conducting foreign investment in sectors
easing of certain stringent FDI guidelines set such as mining, construction, oil and gas and
(Parel, Sewri, Byculla etc)
Ghatkopar (E) -33% forth by Press Note 2 (PN 2) of 2005 still real estate. Per existing guidelines, a
Sion / Chembur -29% seems a distant prospect. Under PN 2, the multinational is considered a holding
Vashi -27% government allows up to 100% FDI in real company and can invest in the
Mulund -26% estate projects with certain caveats, such as aforementioned sectors through the
Source: Knight Frank Research a three-year lock-in on investments, a 'automatic route', which does not require
NCR Residential 2007-08 Peak to minimum capitalisation of USD 10 million FIPB approval. However, Indian subsidiaries
Micro-Market Q1 2009 Price (USD 5 million in the case of a joint venture) of MNCs are considered holding-cum-
Decline and a minimum project size of 10 hectares. In operating companies, a status that requires
Greater Noida -35% January of this year, Vatika, a real estate them to obtain FIPB approval before acquiring
New Friends Colony -26% company, was denied permission to retain stakes in companies, even those operating in
Pockets in Gurgaon (A Grade) -21% some projects that conflicted with the sectors where 100% FDI is allowed. However,
Greater Kailash I & II -19% PN 2 of 2005 ruling that real estate according to the latest amendment, this
Ghaziabad -14% developers cannot own commercial projects conditional requirement to seek FIPB
Noida -10% such as malls under the same company that approval has been waived, and in the last
Source: Knight Frank Research owns projects for which FDI has been three FIPB meetings, permission to invest
accepted. And recently, the rigid stance of through Indian subsidiaries has been granted
Office Market Glance FDI's governing bodies was again brought to companies such as Bridgestone and
Rentals in office markets across the country into sharp focus by the case involving Morgan Stanley.
declined through Q1 2009 as the financial 2i Capital, a private equity fund, and ICP
slump continued to necessitate cost Investments, a fund based in Mauritius. In addition to the above amendment,
trimming, primarily through rent additional measures that have recently been
At a recent Foreign Investment Promotion proposed/undertaken point to the increasing
renegotiation and relocation to cheaper
Board (FIPB) meeting, 2i Capital requested to desire to avail of foreign investment. The
locations. The following tables list the top 6
sell 19 million of its shares in Delhi based real government recently revealed that 49% FDI
micro-markets in Mumbai and NCR in terms of
estate firm Uppal Housing to ICP investments. will now be allowed in almost all industrial
rental decline during Q1 2009 relative to the
The request involved only a transfer of stake sectors of the economy, and even sectors
peak rate observed during 2007-08.
and no repatriation of funds. Per PN 2, such a such as organised multi-brand retail, hitherto
Mumbai Office 2007-08 Peak to transaction would be perfectly legal as long barred from receiving FDI, might now be open
Micro-Market Q1 2009 Price as the actual investment remained to foreign investment through the recent
Decline
untouched. Indeed, the Department of amendment that classifies any company with
Lower Parel -47%
Industrial Policy and Promotion (DIPP) less than 50% foreign ownership as Indian. In
Navi Mumbai -46%
approved of the proposed transfer of shares, addition, the commerce industry recently
Andheri (E) -45%
only for the FIPB to block the same. The FIPB's submitted a proposal that if approved, will
Worli - Prabhadevi -44%
stance on the matter is difficult to allow realty companies that obtain FDI under
Malad - Mindspace -42%
comprehend not only because the proposed the stipulated guidelines to divert surplus
BKC / CST Road -40%
transaction falls within stipulated guidelines, FDI, if any, to projects that are not allowed FDI
Source: Knight Frank Research
but also because ICP Investments claims to under existing guidelines.
have already invested USD 45 million in
NCR Office 2007-08 Peak to
Micro-Market Q1 2009 Price Uppal Housing and plans to invest Further FDI amendments can be expected as
Decline substantially more. the government continues its endeavors to
Gurgaon -39% promote foreign investment in an Indian
It needs to be noted though that a series of economy that has been rocked by a lack of
Okhla Industrial Area -38%
measures proposed by the government from domestic financing. The encouraging sign for
Bhikaji Cama Place -36%
the start of 2009 highlight the growing the real estate sector is that the government
Noida -36%
commitment to utilise FDI to stimulate the seems to be placing special emphasis on the
Nehru Place -22%
nation's economy. The country's real estate realty and infrastructure sectors.
Connaught Place -21%
Source: Knight Frank Research
sector could benefit from a recent

India Research 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.