Prime Urban Development India Ltd Management Discussions.

Indian Economy

Indian economy at the start of 2017-18 felt the continuing effects of demonetization which were further compounded by the implementation of GST in the 2nd quarter. This coupled with high Non-Performing Assets accumulated with Public sector banks worsened the liquidity in the economy. However, in October government announced a mammoth recapitalization plan of Rs 2.11 lakh crore for public-sector banks. This is expected to improve the liquidity position going ahead. Despite these issues Indias GDP recovered and is estimated to have increased at 6.6% in 2017-18 and is expected to grow 7.3% in 2018-19.

Inflation, especially retail inflation that hit a 17-month high of 5.21% in December 2017, moderated a bit in January 2018 to 5.07%. Further moderation in retail inflation continued in the following months. In March, the CPI stood at 4.28% compared to 4.44% in February.

With the improvement in the economic scenario in the latter part of the year and with India rising 30 places in the World Banks ease of doing business report, there have been an increase in investments in various sectors of the economy. The M&A activity in India increased 53.3% to US$ 77.6 billion in 2017 while private equity (PE) deals reached US$ 24.4 billion.

Indian Real Estate

The Indian residential market has breached new lows in terms of supply and sales for every successive year of this decade. Despite the massive need for housing that India is facing, huge unsold inventories caused by a prolonged focus of the developers on the wrong apartment ticket sizes have resulted in the poor performance of the residential real estate industry. The government aggressively tried to push a culture of transparency through measures such as demonetizations, Goods and Services Tax (GST) and the Real Estate (Regulation and Development) Act, 2017 (RERA) which are expected to alter the course of the industry in the long term.

NCR and Mumbai saw sales numbers increased by 21% and 19% YoY respectively during H2 2017 but this can be attributed to the extremely low sales during H2 2016 caused by the demonetization drive carried out by the government.

As seen in the above figure the affordable housing drive promoted by the government has started to yield results as the house price to income ratio has progressively decreased from 2010 to 2017 in the major metropolitan cities in India.

Private equity and debt investments in Indias real estate sector grew 12 per cent year-on-year to US$ 4.18 billion across 79 transactions in 2017. In 2017, M&A deals worth US$ 3.26 billion were made in Indias real estate sector. Private equity investments in Indian retail assets increased 15 per cent in CY 2017 to reach US$ 800 million. India is expected to witness an upward rise in the number of real estate deals in 2018, on the back of policy changes that have made the market more transparent.

The real estate sector has started showing signs of improvement in FY18 as can be seen from the data on Housing sales. As per the latest available data the Housing sales in the month of April have increased by a good 25% as compared to the previous month in the countrys 7 major cities as per a report published by a known property consultant (ANAROCK).

Investment Destination

The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. Private equity investments in real estate are estimated to grow to US$ 100 billion by 2026 with tier 1 and 2 cities being the prime beneficiaries. India stood third in the US Green Building Councils (USGBC) ranking of the top 10 countries for Leadership in Energy and Environmental Design (LEED) certified buildings, with over 752 LEED-certified projects across 20.28 million gross square meters of space. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received Foreign Direct Investment (FDI) equity inflows to the tune of US$ 24.67 billion in the period April 2000-December 2017.

Government Initiatives

The Government of India along with the governments of the respective states has taken several initiatives to encourage the development in the sector. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. Below are some of the other major Government Initiatives:

• In February 2018, creation of National Urban Housing Fund was approved with an outlay of Rs 60,000 crore (US$ 9.27 billion).

• Under the Pradhan Mantri Awas Yojana (PMAY) Urban 1,427,486 houses have been sanctioned in 2017-18. In March 2018, construction of additional 3,21,567 affordable houses was sanctioned under the scheme.

• Subsidy eligibility under Pradhan Mantri Awas Yojana (PMAY) covers up to Rs. 12 lakh of home loan-reduces effective home loan rates to 0.30% for mid-income affordable housing.

• Homebuyers can withdraw from their accumulated EPF corpus for both the down payment on their house as well as paying their home loan EMIs.

• Increased tax incentive reduces effective home loan yields to 0.30% for a 8.35% home loan.

• 100% tax exemption on profits from construction of affordable housing will attract organized developers and increase supply.

• PMAY projects to be out of purview of GST. Service tax exemption on construction of affordable housing projects will lead to reduction in prices, increasing affordability.

• The 7th pay commission increases the annual payout to 10mn government employees to up to Rs. 1 Tn per annum. Increased disposable income will have positive impact on the housing sector.

Budget 2018-19 proposals for Real estate

• Lower allocation for CLSS-MIG (Credit Linked Subsidy Scheme) component an indication of lower than expected demand for the subvention scheme. Allocation to MIG CLSS reduced from Rs 1000 crore in FY18 to Rs 900 crore in FY19 and revised estimate for 2017-18 at Rs 600 crore.

• Government will also establish a dedicated Affordable Housing Fund (AHF) in National Housing Bank, funded from priority sector lending shortfall and fully serviced bonds authorized by the Government of India.

• Long term capital gains on sale of REIT/Invits units will be applicable at 10% (in line with equity). However minimum long term holding period remains unchanged at 3 years. Marginally negative for the asset class.

• Government allows calculation of property gains taxes on properties transacted lower than circle rates if the value is within 5% range. Lowers tax incidence for transaction taking place at marginally lower than circle rate.

• Government will tax conversion of inventory into capital asset as business profit/gains. Fair market value of the inventory on the date of conversion to be considered as full value of consideration and holding period of capital asset will be considered from the date of conversion.

• Profits arising from a construction contract or a contract for providing services shall be determined based on percentage of completion method.

South India: Real Estate

A robust establishment of skill-based manufacturing industries has led to fast paced urbanization in south India, housing around 102.8mn people in just urban areas (27.3% of Indias total urban population). Tamil Nadu, Andhra Pradesh, Karnataka and Kerala house close to 50% of the total number of SEZs in the country. Together with industrial growth, IT remains the dominant driver for the real estate market.

The growth potential in southern India is humongous. Tamil Nadu contributes approximately 10.93% to Indias overall GDP and ranks 2nd among the 36 Indian States & Union Territories in terms of GDP contribution. Contribution of the southern states of India is nearly 31% of the GDP of India. The Real Estate sector in the South is also picking up on account of growth in sectors like Auto, Consumer goods, Power consumption & Cement in the recent past.

About Tirupur - Our core market:

Coimbatore - Manchester of South India

Coimbatore is the second largest city in Tamil Nadu and is advantageously located between tourists attractions like Ooty, Kodaikanal and Coorg. Along with Textile, it also houses Engineering, Automobile parts manufacturing & IT/ITeS as the major industries.

It was one of the 20 cities who were named in the Smart cities mission initiative of the Government of India. Central Coimbatore, adjoining an 8-lake network, is selected as the area for development under the Smart City initiative. In India owing to the huge demand, focus has now shifted to Tier II cities. Coimbatore is already witnessing an increased real estate demand.

The Residential sector is also witnessing positive traction with the increased commercial activity, coupled with the Smart City initiative and industrial demand. Demand for second home and retirement communities continues unabated. Areas of the city such as R.S. Puram, Avinashi Road, and Race Course, are considered as posh areas. Areas of Avinashi Road and Saravanampatti, Mettupalayam Road and Trichy Road are dominated by low-budget projects. Bus Rapid Transit System, Expansion of Airport are few factors that will provide growth opportunities. Around 3 special IT Economic Zones have been set up here, with the Government offering special schemes to promote real estate activity.

Demand for Commercial properties have been on an uptrend in Coimbatore, it was among the few Indian markets where office space uptake was positive in recent years. This demand was coming in from the SMEs in the city.

The developers are trying to cater to the consumers according to their spending capacity by avoiding high end or super luxury launches in the market. With the positive sentiments on the city and its business-friendly environment real estate market will grow tremendously in Coimbatore.

At Prime Urban, we are optimistic about the growth opportunities prevalent in Coimbatore and will be seeking to exploit the same.

Chennai - a growing real estate market with vast opportunities

Known as the Detroit of India for contributing around 60% of the countrys automobile exports, Chennai - the capital of Tamil Nadu - is also well-known for its port-centric businesses, engineering, manufacturing establishments and IT-ITeS companies. Chennais economy is currently the 4th largest in India. According to Forbes Magazine, the city features in the top 10 fastest-growing cities in the world. Chennai also has a presence of numerous Fortune 500 companies, which leads to a massive employment generation.

Chennai residential real estate snapshot New unit launches in Chennai stood at 4,418 in 2017, with around 45,000 under-construction units. Old Mahabalipuram Road, Perumbakkam, Porur, East Coast Road (ECR) and Pallikaranai are among the most preferred micro markets, with residential property prices hovering in the range of INR 3,500 to INR 8,300/sf. Between 2013-2017, around 1.2 lakh units have been added to Chennais residential market in Chennai. Of the four zones (Central, West, North and South), South Chennai surpassed the others to emerge as the most rapidly-growing market, accounting for 65% of the citys total housing supply since 2013. On this front, South Chennai is followed by West Chennai with a contribution of 27%.

The presence of IT-ITeS establishments, SEZs and manufacturing units have been the primary growth stimulators for the southern region. In addition, rapidly developing infrastructure is boosting the residential real estate market along the Old Mahabalipuram Road (OMR), Thoraipakkam - Pallavaram Road (TPR) and Grand Southern Trunk (GST) Road.

Chennai has the lowest unsold inventory among top 7 cities in India, with its unsold stock of 27,000 units (as of Q4 2017) worth INR 17,500 crore. The estimated period for the unsold inventory in primary sales to get fully absorbed is approximately 32 months, compared to top metros of NCR and MMR which are likely to take 75 months and 61 months, respectively. South Chennai tops the unsold inventory chart, accounting for 69% of total unsold units in the city. However, this supply was unleashed to cater to the massive existing demand in this region, and absorption will be rapid.

The mid-income housing segment, consisting of units priced at between INR 40 - 80 lakh, accounts for 44% of the overall available inventory. This segment currently dominates the primary sales residential market in Chennai, followed by the affordable housing segment (units priced below INR 40 lakh) which accounts for 29% of the existing primary market supply. The considerable traction being seen in the affordable and mid-range housing segment is primarily due to the various schemes and incentives offered by the Government to promote its Housing for All mission.

Chennais residential real estate market took a major body-blow from the floods in 2015 and the political instability in the consecutive years. As a result, it witnessed reduced new launches in 2017. With restricted supply and stable demand, absorption improved in 2017, and unsold inventory consequently decreased by 24% in Q4-2017 vis-a-vis Q4-2016. Despite the current sluggishness of the Indian residential property market, Chennais housing sector market is gradually gaining new momentum on the back of continuous infrastructure upgrades and inward migration of working population responding to the increasing employment opportunities

Project Wise Details

At Prime Urban we are engaged with 3 projects currently. All these projects are at Tirupur where we have developed significant real estate experience and with a proven track record built a trustworthy brand image.

• Prime Enclave Vistas - Prime Enclave Vistas is our Apartment project which is setup amidst serene landscape surrounded by nature. The Project was conceived with a single objective to develop a unique residential project in Tirupur, which shall be the first of its kind. The project is designed to match the tastes and mind-set of an elite class of masses, who aspire to live ahead of the times. We have a total of 376 units in this project and we are happy to state that all the units have been sold and handover to the Association formed by the flat owners have been completed.

• The Onyx (Villas) - The Onyx is our Villa Project in Tirupur. The Project consists of luxurious Villas amidst breathtaking, lush landscape and an array of recreation. We have currently constructed 14 Villas. However, looking at the current market conditions we are looking to explore alternate business opportunities for the remaining land parcel.

• Developed Lands - The Company has taken up Developed Land Projects and successfully completed sale of Lands measuring over 143,000 sq. ft. of Land in FY17-18. We have 93,000 sq. ft. land available to sell and are targeting to sell the same within this financial year 2018-19.

At Prime, our projects are signature style and path breaking. We are confident of an excellent quality product for our customers which will improve the living standards and add a whole new dimension of Real estate development. We are confident of better cash flows and profitability going forward which shall be utilized to make deeper inroads in Tirupur real estate market and enter other cities of Tamil Nadu such as Chennai and Coimbatore.

Disclaimers:

Certain statements in the "Management Discussion and Analysis" may not be based on historical information or facts and may be "forward looking statements" within the meaning of applicable securities laws and regulations, including but not limited to those relating to general business plans and strategy of the Company, its future outlook and growth prospects, future developments in its businesses, its competitive and regulatory environment and managements current views and assumptions which may not remain constant due to risks and uncertainties. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include global and Indian demand supply conditions, finished goods prices, stock availability and prices, cyclical demand and pricing in the Companys principal markets, changes in Government regulations, tax regimes, competitors actions, economic developments within India and the countries within which the Company conducts business and other factors such as litigation and labour negotiations. Company assumes no responsibility to publicly amend, modify or revise any statement, on basis of any subsequent development, information or events, or otherwise. The "Managements Discussion and Analysis" does not constitute a prospectus, offering circular or offering memorandum or an offer to acquire any shares and should not be considered as a recommendation that any investor should subscribe for or purchase any of the Companys securities.