by Mr. Shubhranshu Pani, Managing Director – Retail Services, Jones Lang LaSalle India
The vibrancy of the Indian retail revolution is evident through the rapid increase of superlative shopping malls and the distinctive retail stores present all over the India. From less than a million square feet of retail space in 2001, the Indian retail real estate sector has now around 76 million square feet of shopping centre stock.
The liberalisation of FDI policy has further paved the way for investment opportunities in retail as well as the shopping centre industry. The Government of India had allowed up to 51% foreign direct investment in multi-brand retail in 2012 and further relaxed some of the clauses in 2013.
International players would require an Indian joint venture partner to invest the balance 49 per cent in multi-brand retail trading. Foreign direct investment into the retail sector would also give boost to other concomitant segments such as real estate, logistics and warehousing.
With international multi-brand retailers exploring their entry into India, the demand for quality, high-graderetail real estate space is set to expand significantly in the future. The key drivers of retail real estate investment in India can be summarized as follows:
- Liberalization of FDI policy in the retail sector: Encourages shopping centre developers to build larger quality malls as per the requirements of international retailers
- Favourable demographics: Growth of the urban middle class and young population creates demand for organized retail real estate space
- Improving quality of retail assets in India: In the future, retail real estate developments will be transformed to meet international standards in terms of design, ambience and store formats. In order to shape the concept of next-generation malls in India, a lot of investment and funding will be required.
- Increasing consumer exposure to international standards: Rising income among consumers has led to greater exposure to the developed world via increased overseas visits. In order to raise the bar of the Indian organized retail real estate sector, proper planning and structured investments would be required.
- Entry of international retailers in India: The Indian retail sector has witnessed increasing interest from various international retailers, thus boosting the demand for organized retail real estate in India. Several international retailers have already ventured into partnerships with domestic retailers in the cash-and-carry format or under franchise agreements. The entry of multi-brand retailers will augment the need of large-scale infrastructure both at the front and the back end.
- Increase in the number of shopping centres: The Pan India mall stock is expected to increase from 76 million square feet in 2013 to 95.7 million square feet in 2015 in the top seven cities of India. In 2013, an estimated supply of around 5.2 million square feet was registered, which was a 22% increase over the previous year’s supply of shopping malls.
In the future, the average size of malls is likely to increase as developers are focusing on mall sizes that allow for a critical mass in terms of offering various formats and categories under one roof. This, in turn, creates a large pool of investment opportunities for real estate investors to partner with mall developers as they set out to create state-of-the-art retail infrastructure.
The upcoming shopping centres will feature improved quality, thereby becoming investment-grade products. As the market transitions to a more structured and international standard of retailing, more and more investors would be attracted to this sector.
Advice To Investors:
Although the fundamentals are in place, there is still a lack of clarity on certain issues, and this is hampering investments in industry-significant amounts. Political as well as socio-economic and cultural issues play an important role in making the entry into the Indian market viable for international retailers in India. High land costs and rental values are also issues that investors into the Indian retail real estate sector must consider.
Investors will have to assess the risks involved before investing in any shopping centre. The Indian retail market varies significantly across cities in terms of shopping centre sizes, maturity, transparency, business models and socioeconomic profiling. Investors in Tier II and Tier III markets need to be cognizant of the viability of potential shopping centres in terms of performance, business models and the track record of the mall developer active in these cities.
For instance, one of the business models followed by mall developers is selling mall spaces on a strata-titled basis. This implies that they do not sell to one entity, but to multiple investors. Strata-titled malls are not preferred by retailers as there is no single company shouldering the responsibility of future operations, promotions and maintenance.
Retailers have realised that much of the business that a location will generate depends on the experience, resourcefulness and overall performance of the landlord/mall manager. This is why some of the most successful malls in India are purely leased out and not sold piece-meal. Reputed developers with the financial ability to sustain their investment will not sell their mall spaces to multiple investors.
That said, even strata-titled malls can be rendered successful if certain aspects are addressed:
- Mall Management – Every mall needs to be managed in terms of ensuring the right occupier mix and the provision of appropriate facilities and ambience. Malls in which the developers assume the responsibility of mall management – effectively attaching their reputations to the centre – are more likely to succeed.
- Anchors – Anchors are retailers who take a long-term view of their properties and will continue to operate in a mall, thereby driving footfalls. The presence of anchors increases the probability of a shopping centre’s success. For instance, it is essential for a mall to have hypermarket / departmental store, a multiplex and a food court as well as individual restaurants as anchors.
- Infrastructure – An important item on the checklist of a strata investor has to be the infrastructure of the centre in terms of parking, vertical circulation, escalators, lifts, corridors width, etc. If the centre is not designed well, the asset value – and therefore resale value – reduces.
- Overall Performance – The investor has to take a business call on the product as a whole. Retail real estate as an asset only garners returns when retailers pay their rent, which they will only do if they get enough paying customers. The mall should be located within or in the immediate vicinity of a good catchment, or there should be sufficient potential for a lucrative catchment to have formed by the time the centre opens.
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