By
Mr. Suvishesh Valsan, JLL India
The
draft guidelines for trading in REITs in India have been introduced and
allowed. For the very first time, there exists a tool to channel small savings
into the Indian real estate sector. Not surprisingly, several owners of income-generating
properties are now considering setting up REITs.
While
commercial real estate projects have been popular assets to securitise
worldwide, market dynamics in India currently suggest that the retail sector
could be a beneficiary as well. Factors underpinning the potential success of
REITs in retail include:
Low
Vacancies In Superior Grade* Malls
Over
the past few years, developers slowed down the supply of mall space in India
because of rising vacancy rates following the economic slowdown. Prior to that,
developers were churning out malls at a breakneck pace in response to a spurt
in the organised retail business. Back then, few developers understood what the
right ingredients for a successful mall are.
The
overall vacancy rate today stands high at about 20% in retail malls across
major Indian cities, while Superior Grade malls have vacancy rates averaging at
only 10%. Given that international retailers will prefer to take up space in
these malls, the shortage of quality space is evident and will be felt for some
time.
Opportunity
For Discounted Asset Purchases
For
REITs to provide attractive yields, they have to purchase assets at a
reasonable price, which then fetch attractive rents. This is particularly
important for retail - an asset type that is perceived as riskier due to the
lower predictability of income.
While
upcoming Superior Grade malls will offer lucrative investment opportunities,
some of the existing stock of lower-grade malls could be up for sale at a
discount. For instance, of Mumbai’s 65 existing malls, only 20 are of a size
suitable for securitisation in a REIT. Of these, five or six could be
considered distressed assets.
 |
| Suvishesh Valsan, JLL India. |
These
low-grade malls are underperforming due to poor design elements and the
financial distress of their developers. Other factors such as location,
catchment area and retailers’ interest are favourable in many cases. While
REITs will not want to consider malls that are strata sold (another major cause
of mall underperformance), malls that have everything other than design and
finance going for them will be very attractive acquisitions.
Strengthening
Demand..!
Recent
data made available by hiring firms (recruitments), automobile associations
(car sales) and the central bank (home loan disbursals and reducing inflation)
suggest that consumer sentiment has been on the rise in the past few months.
This
is good news for organised retail, and indicates a rise in consumer spending
going forward.
Mall
Management..!
When
compared to the management of commercial buildings (which share common
facilities and have relatively stable tenancy profiles), the management of
retail malls is complex. Apart from catering to various brand categories, mall
management also involves planning the right tenant mix, space optimisation and
zoning, and constant adaptation to consumers’ shopping behaviour.
It
is fairly certain that REITs would employ better mall management professionals
and practices than the mall’s developer. This will increase the probability of
their success.
Given
the limited number of existing malls that fit the requirements, REITs that are
quick to discern and capitalize on the opportunity will benefit. Those that
latch on to the potential later will have to wait until new supply of suitable
malls hits the market. Moreover, the rising consumer and retailer sentiment
will lure REITs into seeking these low-hanging opportunities.
*
Malls are classified as Superior Grade based on location, developer reputation,
occupiers’ profile, business model, mall design and other qualitative features
such as mall management, ambiance and experience at the mall.
About
the author
Mr.
Suvishesh Valsan is Senior Analyst (Research & REIS) JLL India
For
Media Contact
Arun
Chitnis
Head
– Corporate Communications & Media Relations
JLL
India
Pune
411001.
Tel:
(020) 30930441 Fax: (020) 40196101
Mob:
+91 9657129999
Website:
www.joneslanglasalle.co.in
Blog:
www.joneslanglasalleblog.com/realestatecompass
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