>Real Estate (CITI)

● High vacancy, weak demand hint at further downside risk in office space market — Cushman and Wakefield data suggests rentals for office space across key cities were down an avg 7% in 4Q08 vs. 3Q08 (Fig 8), with NCR, Mumbai and Pune experiencing the sharpest falls in rentals (8-13%). With a marked slowdown in demand, supply > absorption, vacancy levels up significantly (Fig 7), especially in peripherals of Bangalore, Chennai and Pune (16-18% in 4Q08), we see further downside risks to the office rental market.

● Peripheral locations across key cities most at risk — OMR in Chennai registered vacancy of >40% in 4Q08; vacancy stood at 22% in Whitefield and Sarjapur Outer Ring Rd in Bangalore and 18% in peripheral areas of Hadapsar, Kharadi in Pune. Though rentals are already quite low in these locations (Rs25- 38/sf/mth), with slowdown in IT, we do not foresee any near-term recovery.

● Supply, however, came off in 4Q08 — This is a trend across most cities (Fig 9- 14). Moreover, actual office supply in end-2008 is much lower than estimated at the beginning of the year, especially for Mumbai, NCR and Pune (Fig 16).

● Ishaan sees some cancellations in pre-let commitments — Its total area let-out, pre-let/under option is now down to ~2.6msf vs. 2.9msf in Dec’08. Marked slowdown has resulted in cancellation of let-out options of ~0.4msf at its Hyd and Navi Mumbai SEZs and push back in est. timelines for several projects.

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