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Macro Economy Has Been Non-Conducive for the Retail Sector


Over the last 6-8 quarters, the retail sector in India has been subject to immense pressures from a slowing economy, stagnancy in jobs and incomes, and lack of stimulus from government policies. More recently, India’s quarterly GDP consistently fell short of the 5.0% y/y growth mark, which was the average growth recorded for the last financial year FY2012-13. For FY2013-14, the economic growth rate is expected to come in at less than that observed in the previous year.

Private consumption expenditure, which is a critical component accounting for over 60% of India’s GDP, saw a growth slump, recording not more than 3.0% y/y growth in the recent four quarters. Lack of confidence among the consuming class due to compromised job prospects and income growth has led a rising proportion of income going towards secure savings rather than consumption spending. High inflation and borrowing rates further derailed hopes of an early recovery. Moderated consumption spending and high inflation has had a direct impact on the retail sector, whose growth momentum has been falling sharply.

Lack of Policy Stimulus & Demand-Centric Mall Development

Mall space absorption continued to remain weak in 2013 from the low levels observed in 2012 across the leading seven cities of India. Factors that were responsible were a poor policy framework and the lack of new mall construction. In the last 6-8 quarters, retail has been subject to difficulties on the policy front, as progress on retail sector FDI hung in the balance. While the ruling government was in favour of liberal reforms in FDI policy, stiff opposition from other political parties gave foreign retailers reason to remain cautious. Also, with the upcoming elections threatening to overthrow the current ruling alliance, withholding investment decisions retailers was probably the best option available to retailers at this time.

While the external environment plays a huge role in demand for retail space, supply is an important consideration too. Premium fashion brands that enter India have had difficulties in finding quality mall space. Major Tier-I cities of Delhi-NCR, Mumbai and Bangalore witnessed a fall in supply of quality malls as developers responded to the current situation by holding on to project completions. Retailers responded by either looking for spaces in quality high streets or by delaying entry completely.

Chennai was an exception to this trend observed in 2013. New mall completions came at regular intervals throughout the year, mostly in growing suburban locations that ensured prices and/or rentals were affordable to retailers. The city witnessed a relatively sharp fall in rentals and prices. Therefore, Chennai performed well amongst all leading cities in India in terms of absorption of space as new retailers stepped up occupancy of quality mall space at relatively cheaper prices and in new locations.

Retail Sector in Transition – Developers Must Gear Up

India’s retail landscape has been witnessing a trend change over the last few years. In the past, value-based retailers were the most sought-after, but many premium brands have found favour among consumers in recent times. Retailers such as , Trent Retail and Indian Terrain benefited from their premium brand positioning, which gave them an edge over brands that primarily target the value-based consumer segment.

This trend is further reflected in the performance of international retailers who have recently forayed into India. Brands such as Zara, Marks & Spencers, Benetton and Tommy Hilfiger posted a healthy jump in their year-on-year revenues, and therefore have ambitious expansion plans for India. These international players have bucked the general trend by offering stylish designs at reasonable prices. These four global brands collectively achieved sales that equalled the apparel sales of established department store chains such as Shoppers Stop and Lifestyle International.

Demand Transition and Stable Rents Likely to Induce Demand

Rental and capital value growths were largely flat in the leading seven cities during 2013. Mumbai witnessed marginally better appreciation in rentals and prices for retail real estate assets. Two factors were responsible for this:

1. As retailers found the market challenging in terms of revenue generation across the country, their focus was concentrated on larger metros such as Mumbai and Delhi. This is reflected in the moderate fall in vacancy levels in these two cities, as against a rise in vacancy in the other cities during 2013.

2. Construction of new malls in Mumbai has been slow over the last 6-8 quarters, thereby limiting supply. Thus, while a weak sentiment did not allow demand and prices to accelerate sharply, limited supply forced a cap on correction to a bare minimum.

Absolute vacancy rate continues to remain significantly higher in Delhi and Mumbai when compared to other cities, largely because of excess supply getting built over the last few years. The cities where vacancy rates increased during the year (over 2012) were Hyderabad, Pune, Bangalore and Kolkata. Hyderabad and Kolkata saw better absorption levels than in 2013, but witnessed a sharp rise in mall supply that led to a rise in vacant stock. In Bangalore and Pune, a combination of fall in absorption and a sharp increase in mall space led to a rise in vacant units.

For the next 3-4 quarters, growth of rentals and capital values in retail will largely remain stagnant. This is because no major foreign retailer has initiated the procedure for investments into India so far. If they do so post-elections, it will fructify into real demand only in 2015. Also, 2014 is likely to witness moderate mall completions in major cities, which will increase supply to some extent. With absorption projected to grow moderately, the additional supplies will result in stagnant/marginal growth of rentals and capital values.

Going forward in 2014, the general elections and political agenda of the new government will set the mood for the near-to-medium-term. The industry depends on the new government to provide a hindrance-free operating environment for the new government that will hopefully be unequivocally pro-reform.

About the Author

Ashutosh Limaye is Head – Research  and  REIS at JLL India