SEZs : Offering New Opportunities

K MalmaruganVP – Infrastructure/MARG

March 23, 2007

MARG Profile

• Incorporated in 1994 and headquartered in Chennai

• Promoted by Mr GRK Reddy, a first generation entrepreneur having decades of experience in real estate and financial services

• Early mover in Chennai realty space with focus on IT Corridor

• Business organised into two verticals –– Real Estate and Infrastructure

• MARG’s shares listed in Bombay Stock Exchange, Madras Stock Exchange & Luxembourg Stock Exchanges (FCCB)

• An ISO 9001 : 2000 Certified Company

Completed Real Estate Projects

Digital Zone I, Software Technology Park, Karapakkam, Chennai (built up area 2.4 lakhs sq. ft) and leased to Tata Consultancy services

Marg Square, Software Technology Park at Karapakkam, Chennai (Built up area of 2.05 lakh sq ft) and leased to Satyam Computers

Digital zone II, Software Technology Park at Karapakkam, Chennai (built up area of 2.16 lakh sq.ft) and leased to Scope Intl, a subsidiary of Standard Chartered Bank

Slash Support Systems, Software Technology Park at T.Nagar, Chennai

Wescare Towers, an office complex in Chennai.

Subhodaya, a housing complex in Chennai

MARG’s Upcoming Real Estate Projects

• Riverside Mall – Shopping Mall on OMR at Karapakkam• Marg Greens – Residential colony at Alathur• Marg Garden – Residential Apartments at Thandalam• Marg Oakwood – Serviced Apartments at Kazhipattur• Residential Apartments at Kalavakkam

Marg OakwoodTranquil Cove

MARG Riverside

Karaikal Port• Development of all-weather port at Karaikal

• Concession Agreement (CA) signed with Government of Puducherry in Jan 2006

• Phase I comprising two berths for handling 4 Million Tonne – one each for coal and general cargo

• Estimated Project Cost : Rs 450 Cr

• Financial closure achieved and works commenced

• Commercial operations slated to commence in October 2008

• Ultimate capacity of the port would be 10 Million Tonnes

SIGNA

• Signa Infrastructure India Ltd (SIGNA) promoted as 74:26 JV by HUDCO and MARG Constructions Ltd (MARG)

• SIGNA incorporated with the objective of harnessing the synergies of– HUDCO’s financial strength and technical know-how and – MARG’s project development and implementation competencies

• SIGNA, the only JV of HUDCO in South India

• SIGNA to focus on large infrastructure projects of Central and State Governments posed under PPP format

Seekinakuppam SEZ

312 acresLight Engineering (incl Auto Ancillary)

300 acresMulti Services SEZ

Seekinakuppam Village in CheyyurTaluk of Kanchipuram District- 70 kms from TIDEL park - 55 kms from Siruseri- 60 kms before Pondicherry- On East Coast Road

Proposed SEZ

In-principal approval obtained

Master planning by C.R.N Architects

Site at Seekinakuppam

Dry land with no displacement

22%16%5%5%3%

22%2%2%1%

0.5%2.5%

8%10%1%

%

612Total

132.41115.7711.5530.6015.67

306

131.5810.1010.106.122.63

15.0248.9661.2020.29

306

LES PlotsMS PlotsMS TowerRoadsOpen SpaceProcessing Zone

Villas / Apartments Shopping MallConvention CentreSchool & Hostel HospitalDesal PlantRoads Open Space Support FacilitiesNon-Processing Zone

Acres Item

LES/MS Plots MS TowerRoads Open,LandscapeShopping Mall SchoolBanks & Offices Conv CentreHospital Utilities5373 apts, 180 villas

Allocation Plan

Project Cost estimated at Rs 1200 Cr

SEZs in Pipeline

• IT/ITES SEZ in Tirupati

• Construction related SEZ in Kodad, Andhra Pradesh

• Port based SEZ at Karaikal

Structure of Presentation

• Special Economic Zones

• Real Estate Sector

• Emerging Opportunities in SEZs

• Points to Ponder

Special Economic Zones

Special Economic Zones

A specifically delineated duty free enclave that is

deemed to be foreign territory for the purposes of

trade operations and duties and tariffs

Economic Logic

• SEZs, an attempt to address :– infrastructural deficiencies – procedural complexities – bureaucratic hassles and – barriers of monetary, trade, fiscal, taxation, tariff and labour policies

• Since countrywide infrastructure development is complex and timeconsuming, SEZs are seen as important tool in expediting industrialisation

• Success of Chinese model

Forerunners

• First Free Trade Zone (FTZ) set in 1947 in Puerto Rico

• Next FTZ in Ireland in 1960

• Asia’s first FTZ set up in Kandla in 1965– SEEPZ set up in 1972

• Shenzhen, Zhuhai, Xiamen and Shantou set up in 1979 in China– China has just 6 SEZs

• Role Models – Shenzhen and Jebel Ali (Dubai)

• Export Processing Zones – forerunner to SEZ in India

• India’s SEZ Policy – vintage 2000; SEZ Act – Feb 2006

Some Statistics

• 63 SEZs notified as on January 2007– 36 IT/ITES SEZs

• 14 SEZs already functional– MEPZ SEZ, Mahindra City – SEZ

• 237 SEZs received formal approvals

• 164 SEZs have in-principle approvals

More Statistics

• 3,000 SEZs worldwide in 120 countries

• SEZs generate USD 600 bn in exports and provide jobs to 50 mn

• As on Mar 31, 05, in India, 811 units situated in 8 functional SEZs– Estimated exports : Rs 1831 Cr– Employment : 1,00,650

Emerging Scenario

• India likely to have more than 500 SEZs, if all applications andintentions translate into reality

• Estimated investment : Anywhere from Rs 3 tn to Rs 4.25 tn!

• Employment generation : Anywhere from 5 lakhs to 3 million!

‘…SEZs will ultimately generate 3 million jobs, an annual turnover of Rs 15,00,000 crore ($335 billion: 25-35% of India’s annual GDP over the next several years), and will multiply

Indian exports five-fold to $ 500 billion per year?...’

Real Estate Sector

Overview

• RE Market currently estimated at USD 16 bn, likely to grow 3.5 times to USD 60 bn by 2010

• FDI in real estate growing steadily from 4.5% of USD 2.7 bn in 2003-04 to 26.5% of USD 8 bn in 2006-07– Fears of overheating – RE Bubble ?– Participatory Notes Vs Hedge Funds– RBI’s move to treat lending to SEZs on par with RE sector

Demand for Office Space

• Demand for office space grown from 4 mn sft in 1999-00 to 19 mn sft in 2006-07

• 75% of demand to come from IT/ITES sector

• Expected requirement in 2010 for IT/ITES sector : 200 mn sft

Demand for Dwelling Units

• As per 10th Five Year Plan, shortage of dwelling units estimated at 22 mn units

• 70% of above units to cater for middle and lower income groups

• Demand from lower strata still largely unmet and is set to emerge as a major opportunity

Spiralling Costs

• Rentals in NCR and Gurgaon reported to have increased by 90% to 100% last year

• Rentals of office space also shown similar trend with capital values rising by 150%

• Office rentals in Mumbai in areas like Lower Parel and Bandra-Kurla Complex also shown similar trend

• Chennai, also witnessing booming RE market– HTL deal : 11 acres for Rs 297 Cr– Rentals breaching Rs 60 to 70 sft in areas outside Corporation limits

Hospitality Untapped

• Estimated additions by 2010 : 50,000 to 70,000 rooms

• Average Room Rents, one of the highest in the world

• Tourism sector recording very high growth rates– Foreign tourist arrival estimated at 4.42 mn in 2006 (13% growth)– Strong growth trends in domestic tourism as well

• Emerging trend : Leading Realty Developers tying up with Premium Hotel Chains :– For tapping the growing demand– Insulation from vagaries of RE sector

Opportunities almost unlimited for RE Sector considering theburgeoning growth in demand for residential and official spaces,

SEZs and hospitality segments

Emerging Opportunities in SEZs

Opportunities Galore

• Huge untapped demand for RE Sector arising out of new SEZs

• More than 50 to 70 SEZs to be IT/ITES SEZs– FSI and Ground coverage likely to be higher

• Processing area in SEZs to be mostly around 35% - 40%

• Malls, hospitals, multiplexes, hotels and convention centres in addition to service apartments and residential/office complexes

• Construction of industrial/manufacturing units to also emerge asan attractive area

Advantages of SEZs for Developers

• 100% FDI allowed for – Township with residential, educational and recreational facilities– Franchise for basic telephone services in SEZ

• Income Tax benefit under Section 80IA (10 years in block of 15 years)

• Duty free import/procurement of domestic goods for development and O&M of SEZs

• Exemption from Service Tax/CST

• Income of infrastructure capital fund/company from investment exempt from IT

Other Advantages

• Investment by individuals in SEZ companies exempt under Section 88 of IT Act

• Developer permitted to transfer facility for O&M

• Generation, transmission and distribution of power allowed

• Freedom to allocate space and built-up area to approved SEZ units on commercial basis

• Provision of utility services, restaurants, security services oncommercial basis

Areas of Opportunities

• Developer of facilities

• Facilities Management

• Other forward and backward linkages – Provision of utility services– Landscaping and horticulture– Architectural Design and PMC services (DLF and Feedback)– Generation, transmission and distribution of power– Back office services

Our Outlook for Developers

• Likely number of SEZs in next 3 years : 150 (subject to non-stipulation of cap in numbers)

• Average size per SEZ : 100 hectares

• Total land area : 150,000 hectares

• Minimal development cost per hectare : Rs 2 Cr per hectare

• Total investment in RE facilities : Rs 300,000 Cr(excluding cost of plant and machinery for processing area)

Our Outlook for Facilities Management

• World-class assets require high quality O&M to preserve and sustain their utility and viability

• Facilities Management, still an uncharted area

• Leading RE players, intending to diversify into facilities management

• Estimated market size for SEZs : Rs 18,000 Cr (6% of Investment for good quality asset)

• MARG is setting up a separate BU for Facilities Management!

More on the Anvil

• Education SEZs

• Health Care SEZs

• Power SEZs

• Tourism SEZs (Special Tourism Zones)

• Entertainment SEZs

• Shared land banks

• Common infrastructure facilities across neighbouring SEZs

• Mortgage Markets

• Maturing of rental markets

Positive Fallout• Inflow of huge FDI

• Impetus to manufacturing and services industries and emergence of Indian Multinational Companies (MNC)

• Large scale investments to lead to consolidation and emergence of key players at regional levels

• Adoption of modern construction, management and O&M technologies and practises

• Global alliances and collaboration

• Standardised service levels in terms of construction, delivery and management of assets – Real Estate Development Regulatory Authority ?

• Significant ripple effect – indirect jobs, hinterland development

Points to Ponder

SEZs will drive investment and production away from the

Domestic Tariff Area and lead to significant revenue losses,

which some estimates put at Rs 175,000 Cr !

The Chinese started with four SEZs and have six now.

We are going in for SEZs on a cottage industry basis !

SEZs will be at the expense of established urban centres and

Central Business Districts and would drive away investments

from these areas, making them unliveable !

SEZ Policy is a response to governance failure. Perhaps it reflects a belief that growth and social justice cannot be reconciled – so you go for growth and leave

social justice for Domestic Tariff Area to handle !

Why doesn’t the State encourage industry to develop the more than 20% (68 million hectares) of the country’s land area that is officially classified as ‘wasteland’ instead of focusing on taking away huge chunks of lands from the

country’s farmers ?

We will give you our blood but not our land.

- A Resident of Nandigram

…In India there is a sacred bond that binds the tiller with the

land. If you want to snap that bond, do that with great

caution. Don’t think you can do it lightly…it is a minefield !

- Mr P Chidambaram (Jan 2007)

Thank You