This document summarizes the state of the US real estate markets, including both housing and commercial real estate. While the housing market is showing some signs of improvement with rising home sales and prices, there are still concerns around potential additional foreclosures and difficulties for builders and buyers to obtain financing. The commercial real estate market is seen as the next potential drag, with continued declines in property prices, rising foreclosures, and risks that a large portion of loans from 2006-07 will not qualify for refinancing. Losses in commercial real estate could negatively impact US banks and increase risks of further bank failures.

1. US Real Estate Markets:
Commercial Real Estate the next drag
Manas Paul
Axis Bank Research - August12, 2009

2. Drags in commercial real estate and concerns in housing despite some recent
improvement can stand in the way of a faster US recovery
• Despite improvements in there are concerns in US housing market
• risks of potential addition to inventories (delinquencies, foreclosures and
home owners waiting to sell at better price)
• Difficulty in getting finances both for builders as well as buyers due to
excessive caution and rising lending standards
• Affordability not holding up
• But commercial Real Estate Market is perceived to be the next drag
• Unabated fall in commercial property prices and rising foreclosures
• Concerns over a large part of USD200bn plus loans granted in 2006-07
coming up for refinance in 2009 might not qualify for refinancing without
significant equity infusion amidst declining value of collateral
• Risks of commercial real estate losses for US banks and further bank failures
• Fed governors have raised their concerns over “maturing loans on
depreciated commercial properties”
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3. Recent Improvements in US Housing Market
Home sales improving consistently for the last 3mths ….amidst falling inventories
Mths of s upply
'000 '000
Ne w H o m e S a le s Ex is tin g H o m e S a le s New Home Inventory (MOS) Existing Home Inventory (MOS)
14
5200 50
12
5100 45
5000 40 10
4900 35
4800 8
30
4700
25 6
4600
20
4500 4
4400 15
10 2
4300
4200 5
0
4100 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09
Ju n - 0 8 A ug-08 O c t- 0 8 De c -0 8 Fe b - 0 9 A pr-09 Ju n - 0 9
Housing starts and permits supports forward momentum
….and rising prices, Case Shiller rose for the first time in
May in 3yrs
Median Existing Home Sale Prices Case Shiller Price Index '000 '000
240 Ho u s in g Pe r mits Ho u s in g S ta r ts
1 ,4 0 0
220
1 ,2 0 0
200
1 ,0 0 0
180 800
600
160
400
140
200
120
0
100 Ju n - 0 8 A ug-08 O c t- 0 8 De c - 0 8 Fe b - 0 9 A pr-09 Ju n - 0 9
Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09
Source: US Census Bureau, National Association of Realtors, Bloomberg 3

4. …but not without concerns
• Risk of potential addition to inventories Rising Delinquencies but affordability not holding up
• On account of rising foreclosures (1.5mn properties received D e lin q u e n c y R t (R e s ) D e lin q u e n c y R t (C o m m )
a default, or auction notice or were seized by banks in 1H09 9 200
– a 15% y-o-y increase (bloommberg news) 8
A ffo rd a b ilit y In d e x (R H S ) 180
7 160
• 75% of the (est. USD0.5trn) outstanding payment option 6
140
adjustable rate mortgages to require higher payment in 2010 Re c e
nt 120
5 In aff declines
and 2011 peaking in Aug 2011 ordab
ility 100
4
80
• Risks of homeowners waiting to offload their holdings with 3
60
price improvements…estimates of survey results by 2 40
Zillow.com showed the possibility of additional supply of 1 20
20mn
0 0
Ju n - 0 8 A ug-08 O c t- 0 8 De c - 0 8 Fe b - 0 9 A pr-09 Ju n - 0 9
• Home builders facing increasing demands on the loans
they have and new loans they seek - Requirements for
obtaining new A, D & C (acquisition, development and …mortgage rates inching upwards with yields
construction) loans have grown increasingly restrictive
9 US Govt Bond 30 year Index 30 YR m ortgage fixed rate average
• Potential home buyers need large down payments and 8
excellent credit scores to obtain a mortgage amidst
ongoing employment conditions 7
6
• Excessive caution by some appraisers leading to many
cases of appraisals significantly below the agreed upon 5
sales price, in some instances even below the builder’s
cost of construction 4
3
• Improvements in affordability not really holding up
2
Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09
Source: National Association of Realtors, Federal Reserve, Bloomberg 4

5. Drags of Commercial Real Estate
• US comm. property mkt size at USD6.5trn around 1/3rd the size of ….unabated fall in commercial real estate prices
housing mkt (Oxford Analytics)
4 Moody's/REAL comm. PPI Mthly Returns
• …outstanding loans USD3.5trn of which over 40% held by commercial
banks 2
0
• Unabated fall in property prices Ieading to foreclosures, amounted to
Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09
USD7bn or 4.3% of comm. mortgages by Banks at the end of 1Q09 –
registering more than 100% y-o-y rise & expected to rise to 4.6% by -2
e.o.2009 (Foresight Analytics)
-4
• More than USD200bn of the total loans originating in 2006-07 are due
for refinancing in 2009 adding up to USD1.4trn till 2013…(DB -6
Research)
-8
• ….concerns over parts of that unlikely to qualify for refinancing currently
without additional equity infusion amidst declining value of collateral -10
NCREIF Property Index (NPI) Total Returns
• ….implying commercial real estate loses for US banks & risks of more
bank failures, especially regional banks having commercial real estate
loans as an important part of their portfolio 1Q 09 2Q09 1yr
NPI (total) -5.20% -5.20% -19.60%
• Janet Yellen Guv. San Francisco Fed (voting member): Apartm ent -8.70% -5.13% -20.90%
Hotel -8.55% -5.46% -23%
“…Our biggest concern now is with maturing loans on depreciated
commercial properties…. the economic forces hammering commercial Industrial -7.50% -5.09% -19.22%
property are unlikely to reverse anytime soon ” O ffice -7.97% -6.52% -22.20%
Retail -4.31% -3.03% -12.90%
Source: MIT Centre for Real Estate Data Laboratory Initiative, National Council of Real Estate Investment Fiduciaries (NCREIF) 5

6. Annexure: US foreclosure Update
• Foreclosure actions were initiated on 1.37% of first
mortgages during the first quarter of 2009
• SADJ delinquency rate was 9.12% of all loans outstanding
as of the end of the first quarter of 2009, up 124 basis
points from the fourth quarter of 2008, and up 277 basis
points from one year ago
• The percentage of loans in the foreclosure process at the
end of the first quarter was 3.85%, an increase of 55 basis
points from the fourth quarter of 2008 and up 138 basis
points from one year ago. Both the foreclosure inventory
percentage and the quarter to quarter increase are record
highs
• Shifting away from sub prime to prime
• foreclosure rate on prime fixed-rate loans has
doubled in the last year, and, for the first time since
the rapid growth of subprime lending, prime fixed-
rate loans now represent the largest share of new
foreclosure
• In addition, almost half of the overall increase in
foreclosure starts we saw in the first quarter was due
to the increase in prime fixed-rate loans
• Pointing to the impact of recession and drops in
employment on mortgage defaults
Source: MBA national Delinquency survey, Federal Reserve of San Fransisco 6

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