This publication provides insights on the commercial real estate market, which is bearing the brunt of subdued economic activity, high cost of finance and falling rental incomes. www.wcgt.in/publications

1. RealtyReality
Insights for Real Estate and Infrastructure industry leaders
A newsletter under Grant Thornton Insights series | Issue 5
Grant Thornton
INSIGHTS
Series

2. About Grant Thornton Insights Series
Grant Thornton Insights Series brings to you a set of
tri-annual thought-leadership newsletters such as:
• Aspire: Insights for dynamic business owners
• India Ahead: A snapshot of emerging economic and
business environment in India
• HealthScope: Insights for Healthcare and Life Sciences
Industry leaders
• RealtyReality: Insights for Real Estate and Infrastructure
Industry leaders
• TechEdge: Insights for Information and Communication
Technology Industry leaders
This series of publications draws on our industry expertise,
clients‟ experiences and our commercial know-how. It
discusses the underlying issues, challenges, and industry and
market dynamics that impact Indian businesses over medium
to long term.
More about RealtyReality
Published tri-annually by Grant Thornton India, RealtyReality
is a thought-leadership newsletter focused on providing
leading-edge insights on the Real Estate and Infrastructure
industry of India.
Acknowledgement: Neeraj Sharma & Misbah Hussain
Editor: Vikram Jethwani
www.wcgt.in/publications

3. Preface | Pg 4
Strategic framework for CRE
companies| Pg 14

4. Preface
The weakness in global economy has created In other cases, however, lenders are selectively
considerable levels of distressed real estate in a ignoring the issue in order to avoid writing down loan
number of markets around the world. In all but a few values, which would potentially compromise their
locations, reduced economic activity and growth own balance sheets and capital adequacy
prospects have led to falling rental incomes, collapsing requirements. In effect, these institutions are
property values and construction projects being put essentially hoping that the economy will right itself
on hold. and their loan portfolios will recover without the need
of significant additional capital injections into the
This in turn has turned many previously „performing‟ bank.
commercial real estate loans and investments into
„underperforming‟ or „non-performing‟ assets. Banks
and other lenders are increasingly being exposed to
these assets.
This situation is further complicated by the reality that
many lenders are themselves in varying states of
"distress", and are trying to resolve their portfolios of
distressed loans. Faced with significant regulatory
pressure, banks are tightening lending criteria,
reassessing loan to value ratios, and trying to shore up
their RE&C loan portfolios in order to preserve their
own financial independence.
Some banks have become less willing (and possibly
unable) to negotiate better terms from the perspective
of the distressed asset holder.
RealtyReality | 4

5. "Though many observers believe that the recession officially ended
in the summer of 2009, most industries, including commercial real
estate, continue to feel its effects. CRE industry fundamentals
remain subdued and according to industry estimates, no meaningful
recovery in the West, can be expected soon. This is not surprising
given that the CRE industry usually lags behind the general
economy by 12 to 18 months. The extent and timing of upswing in
CRE will largely depend upon geographic market and asset class."
Vishesh Chandiok
National Managing Partner
Grant Thornton India
RealtyReality | 5

6. Global landscape
The US:
• As per industry estimates, over US$1.4 trillion of debt in real estate assets will
become mature by 2014, creating immense pressure on banks for coming up
with solutions to resolve troubled loan issues.
• This scenario can have a delimiting effect on the recovery of the US economy,
owing to the pressure on banks to sell loans at a price lower than their face
value, in order to prevent losses.
• Driven by the assumption that valuations will increase in 2011, Real Estate
Investment Trusts (REITs) will begin to look out for opportunities to acquire
properties, including the distressed properties, at reduced prices.
The UK:
• UK's CRE market continues to show signs of weakness with occupier
demand falling in negative territory.
• Lenders will be under pressure to find ways to resolve their troubled loan
portfolios due to the wave of debt maturities.
Brazil and Mexico • Property prices in the country will become stable, owing to the
normalisation of the supply and demand balance.
attracts most of the FDI
in Latin America's
CRE market
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7. Global landscape
Russia:
• It is expected that demand in the commercial real estate sector
will increase marginally, owing to the reduction in vacancy
rates.
• In the overall realty sector, warehouse and retail are expected
to clock the fastest growth.
• The sector is likely to attract sizeable investment; especially in
the the high-quality small to medium size property segment.
Brazil:
• For the next two years, Brazil, being the host of the 2014 FIFA World
Cup and 2016 Olympics, will continue to attract huge investments in
the hospitality sector.
• An export-led boom along with surge in household incomes, entry of
new conglomerates and the increasing trend of opting for better-
placed or more attractive office spaces are the reasons that will drive
the demand for commercial property in the near future.
• Demand for real estate will also be impacted by the recent legislation
reform establishing increased lines of credit to the local mortgage
market as well as consumer finance.
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8. Global landscape
China:
• Though China, like all other BRIC economies, show resilience, its real
estate market is not completely insulated from the global pressure.
• As the opportunities for investing the bulk of domestic savings remain
bleak in the country, real estate will continue to remain an attractive
avenue for investment.
• Affordability has decreased marginally due to the bleak financial
situation of the local government, which is widely in debt after being
handed billions of Yuan in bank loans.
India:
• Banks have reportedly increased risk weightage on CRE financing. Real
estate companies may face cash flow pressure, while they replace low-cost
debt by high-cost finance.
• Developers would be more receptive to new and more collaborative lease
models, in acknowledgement of tenants' concerns.
• Metropolitans may not witness growth in rentals, however, properties that
enjoy strategic locations in Tier 2 and Tier 3 cities are expected to register a
relatively higher rate of growth in rentals and capital values, in the next 2-3
quarters.
RealtyReality | 8

9. Commercial real estate: headwinds in India
However, the industry is about to face a post-recession
As per media reports, the Reserve Bank of India has paradigm, which it has never seen before. The recovery
expressed concerns on escalating real estate prices and
following the 2001 recession is not a good benchmark because
advised banks to keep a stringent check on loans to
CRE companies of late. In order to regulate risks and access to capital may be much more severely constrained. The
make loans expensive, banks have reportedly increased lending market will probably be flooded with demand, while
risk weightage on loans to developers. higher loan-to-value ratios, tighter credit standards and an
uncertain securitisation market may limit refinancing
Amidst this scenario, developers who have already opportunities.
initiated their projects now have no choice but to
borrow from non banking finance companies at interest Interest rates are currently at historic highs, and any
rates ranging from 16-20%, private lenders at 20-35%, further increase in these rates will not only impact the
and private equity firms at 25-35%. This is turn has profitability but also the viability of many CRE projects now
started putting pressure on developers and the entire
teetering on the brink. Those who are unprepared for the shift
market at large.
in the industry may find themselves battling for scarce capital
— even as they struggle against competitors that took
The various players in the CRE industry are in a stalemate of
advantage of the downturn to prepare for the recovery.
sorts. Not enough buyers for CRE assets currently exist,
especially if one excludes the so called vulture investors. The
Therefore, time is of the essence. CRE companies have a
lending community is delaying foreclosure procedures and sale
limited window of opportunity during this industry downturn
of real estate-owned properties because of depressed values.
to make important changes that will affect their future
These factors foster an environment of stagnation in the
performance and viability. All new initiatives should be
global CRE industry, due to which companies may be tempted
evaluated based on their cost versus long-term value
to limp along and simply survive.
contribution. The urgent need today is to take forward-
thinking actions that will drive future growth.

10. Commercial real estate: headwinds in India
Top 5 challenges for CRE companies in 2012
Interest rate hikes 43%
Inflationary pressure 23%
Cost of construction 22%
FDI & FII inflows 7%
Skilled manpower With a view to figure out the top-5 challenges for CRE companies in
5%
2012, Grant Thornton India conducted a survey covering more than
100 CRE developers and dealers in the National Capital Region
RealtyReality | 10
(NCR), Mumbai and Bengaluru. The response from the participants
has been collated as above.

11. “In tandem with the global economic environment, the commercial real
estate sector is in a phase of consolidation. Both real estate developers
and investors are evaluating their current strategies and future
expectations.
Nevertheless, challenges and opportunities are going hand-in-hand:
coping with interest rate hikes and inflation; protecting profits while
continuing to invest; leveraging vibrant domestic economy; seizing
international opportunities; differentiating products and services; retaining
and attracting talent; and cultivating stronger relationships with lenders
and fund managers.
Success in real estate business largely hinges on how you navigate these
complexities, while retaining investor and buyer confidence, and
maximising stakeholder returns.”
David Jones
Partner and Practice Leader – Real Estate
Walker, Chandiok & Co.
11

12. Making ways through panic stations
Amidst the situation of uncertainty in the global economy and Strong financial analysis
weak cues in the domestic market, Indian real estate Developing a financial forecast of continuing and future rental
developers need to evaluate their options for renegotiating revenues, complete with cost analysis and identification of
loans. To do so effectively, they need to have a thorough opportunities to reduce costs could help formulate
understanding of their own financial position as well as strategies to control pressure.
that of their lenders.
Tenants are typically required only to disclose a minimal
In order to face multi-pronged pressure from the market, financial picture, and property owners are faced with a lack of
developers shall consider the following: visibility into current and future rent/revenue streams. Some
RE&C owners display poor record keeping with respect to
Portfolio stress-test loan covenants and hence, risk that they are, or will be, in
For Indian real estate developers, it is the need of the hour to breach.
assess the severity of financial condition, on the spectrum
ranging from potential risks to major problems, both current Negotiate terms, consider re-financing
and future. Developers shall consider assessing their lender‟s ability to
negotiate terms and, if appropriate, consider proactively
In particular, these tests should look at risks of major negotiating with the lender, prior to breaching loan covenants.
tenants leaving or going bankrupt, any co-tenancy
agreements and exposures, and the industry outlook for the Considering options for refinancing also helps in avoiding
various types of tenants currently occupying the properties. the risk of foreclosure. Some of the options to be considered
include extending the term of the loan, restructuring their
credit, or improving management of the property to
accommodate the needs of tenants who are also facing
financial difficulties.
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13. Making ways through panic stations
Stress-test In-depth Re-negotiate
portfolio financial terms
analysis
examine exposure to risks
Multi-pronged market pressures
forecast realistically
re-visit loan covenants
re-negotiate with lenders
consider re-structuring
improve management, prevent leakages
RealtyReality | 13

14. Strategic framework for Indian CRE companies
In the current market scenario, it is advisable that CRE Conformer (low value, high costs)
companies map the universe of available actions on a Actions in the upper left quadrant are costly to
cost-value matrix that has two dimensions: the long- implement and have minimal long-term impact. These
term value added and the short-term costs incurred. actions often relate to problems, which should have been
Actions taken by the company will fall into one of the addressed previously, such as weak or dysfunctional
four quadrants: information and control systems, a lack of discipline
in executing agreed upon plans, and inconsistency
Myopic (low value, low costs) of the cash management system with the stakeholder
Actions in the lower left quadrant are not costly to requirements.
implement, but they have low (and in extreme cases,
negative) long-term impact. One example of this kind of High
activity is leasing to risky tenants in order to boost short-
term occupancy. Similarly, companies often slash capital Conformer Forward
spending and selling, as well as general and Short-term costs
thinker
administrative costs, without analysing the long-term
impact of their actions.
A company should avoid taking actions that decrease
long-term value and should minimise low-impact Myopic Cherry
actions that may distract management from pursuing picker
strategic initiatives.
Low
Low High
Long-term value
The four quadrants of action for CRE companies
RealtyReality | 14

15. Strategic framework for Indian CRE companies
Correcting these problems in a shortened time period Forward thinker (high value, high costs)
can be costly in terms of both time and dollars. Actions in the upper right quadrant are costly to
Companies carrying out actions that fall in this quadrant implement but have high impact. Most of these actions
should attempt to move towards more meaningful, demand the use of resources — capital, time, labour —
higher-value initiatives that yield more results at the same without offering short-term returns. Examples include
cost. strategic capital investments such as the
reconfiguration of leased space, new or redesigned
Cherry picker (high value, low costs) marketing programs, and strategic acquisitions and
Actions in the lower right quadrant are not costly to divestitures.
implement, yet they have high long-term benefit.
Examples include a review of portfolio performance, Unsurprisingly, not all companies are willing — or even
disposition of noncore assets, cash generation able — to make large investments, particularly during a
measures, and a reduction in overhead and period when global signs are weak. But it‟s important to
discretionary capital expenditures. remember that even though these actions do not yield
immediate results, they do have the potential to set the
Because these actions are the corporate equivalent of business apart from its competitors.
low-hanging fruit, a company must assume that its
competitors are drawing advantage from its actions. Any
company that strives to be more competitive must
consider investing additional resources in initiatives,
having the potential to transform it into a market
leader.
RealtyReality | 15

16. About Grant Thornton
Grant Thornton International
Grant Thornton International is one of the world‟s leading organisations of independently owned and managed accounting and consulting
firms. These firms provide assurance, tax and advisory services to privately held businesses and public interest entities.
Clients of member and correspondent firms can access the knowledge and experience of more than 2,500 partners in over 100 countries and
consistently receive a distinctive, high quality and personalised service wherever they choose to do business.
Grant Thornton India
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accountancy firms in the country.
Today, it has grown to be one of the largest accountancy and advisory firms in India with nearly 1,100 professional staff in New Delhi,
Bengaluru, Chandigarh, Chennai, Gurgaon, Hyderabad, Kolkata, Mumbai and Pune, and affiliate arrangements in most of the major towns
and cities across the country.
The firm‟s mission is to be the advisers of choice to dynamic Indian businesses with global ambitions- raise global capital, expand into global
markets, adopt global standards or acquire global businesses. The firm specialises in providing compliance and advisory services to growth
oriented, entrepreneurial companies, and adopts best-in-class international tools, methodologies and independence/ risk management
standards for all its services.

17. Solutions for real estate companies
Our real estate practice Financing your business Communication and compliance
Real estate is a complex business. Owing to its capital intensive nature, • analysing funding requirements • advising on financial reporting requirements
any turbulence in the economic and business environment can affect a • preparing submissions to financiers • clarifying directors‟ responsibilities
real estate business in a number of ways. With its depth of knowledge • benchmarking terms and pricing • mitigating fraud risk
and global experience, Grant Thornton India can assist you in mitigating
• considering alternative sources • evaluating and designing controls
these inherent risks. At the same time, we can help you identify and
leverage potential opportunities as well. Assurance, tax and advisory
Working capital management Human capital management
services are just the beginning of our suite of services.
• managing your cash • optimising pension and benefit schemes
Please contact Nidhi Maheshwari at nidhi.maheshwari@in.gt.com • forecasting and re-forecasting • retaining the right staff
or +91 77380 57904 to know more about our solutions for real estate • optimising tax cash flow savings • devising tax efficient packages
companies. • improving management information • enhancing reward packages
Protecting profits Strategic direction
• product portfolio analysis • benchmarking against competitors
• optimising pricing strategy • entering new markets
• enhancing terms of trade • identifying acquisition opportunities
• identifying overhead savings • reviewing business plans
Operations and cost reduction
• establishing cost reduction
programmes
• improving supply chain
• enhancing operational efficiency
• outsourcing back office functions
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