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India Retail Real Estate: A Journey Akin to a Hurdle Race

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Indian retail real estate seems to have seen it all – from a boom to a burst but still this hasn’t really intimidated the players operating in this field to step back and withdraw from developing new malls and shopping centres. Rather what has happened is that today developers are more cautious, which is proving to be a good sign for the overall growth of the industry. But the million dollar question is, what the future really holds for Indian retail real estate?

Factors propelling the growth of retail real estate

India’s retail sector has undergone a rapid transformation over the past decade and this process is expected to strengthen in coming years with the rise in population, per capita income and urbanisation. According to the provisional estimate by the Census of India 2011, the country’s total population has reached nearly 1.21 billion compared to the 1.03 billion recorded in the previous census of 2001.

This tremendous growth in population has led to an unprecedented scale of urbanisation, with the share of urban population steadily increasing. According to the , India has the highest rate. of change in its urban population of all the BRIC nations and this figure is likely to remain above 2.0 per cent annually for the next three decades. Nearly 64 per cent of the Indian population is in the working age group of 15-64 and 35.0 per cent is relatively young, aged 15-34.

With India’s growing per capita income and a rising middle class, the retail sector has the potential to be the real growth engine of the country’s economy. While demand for a superior shopping experience is evident in the metropolitan cities, the Tier II and Tier III towns are also rapidly acclimatising to the changing landscape of the Indian retail market.

Growing consumerism, changes in consumers’ tastes and preferences, and heightened
brand consciousness has been fast replacing traditional stores with organized retail malls that house lifestyle and luxury brands from national and international retailers.

As part of its retail transformation, India has seen substantial increase in mall space in recent years. Over the past decade, such cities as NCR-Delhi, Mumbai and Bangalore have shown prominent growth in retail stock, while Hyderabad, Pune, Chennai, Kolkata and many other Tier III towns are rapidly emerging as the retail growth corridors of the next decade.

FDI in multi-brand retail: Key to speed up retail transformation

In an important policy move, the Indian government gave permission for up to 51 per cent FDI in multi-brand retail in September 2012. The objective of this policy is to boost the retail business through adoption of international standards and practices. The entry of international products, practices and technology is expected to enhance the efficiency of domestic retailers.

The government has made it mandatory for foreign multi-brand retailers to place at least 50 per cent of their total investment in back-end infrastructure, thus giving a boost to facilities such as logistics and warehousing. With multi-brand retailers exploring opportunities in India, demand for retail space is likely to rise significantly. This will induce developers to launch new malls and, as store size requirements are significantly higher for multinational retailers, will encourage them to build larger malls along with sufficient mall infrastructure.

Quality will also receive a significant boost as the malls will be constructed to meet international standards and norms. The competitive environment is likely to enhance the productivity and efficiency of domestic retailers; with better and more transparent pricing, sales will improve significantly. Domestic retailers will also leverage their portfolios by adopting many ofthe new retail strategies followed by large international retailers.

The average size of shopping malls in India has already begun to increase as developers focus on larger spaces. The success of a mall does depend on its size as superior grade malls are nearly double the size of average grade malls. It is estimated that the average size of a superior grade mall is 400,000 sq ft, whereas the normal size of average grade and poor grade malls are 190,000 sq ft and 150,000 sq ft, respectively.

The larger malls allow for a complete tenant mix in various formats and categories, and can adopt modern mall management practices easily. With the introduction of FDI in multi-brand retail, the average size of a mall is likely to increase as foreign retailers tend to occupy large spaces. As a consequence, both total mall supply and size are expected to increase over the medium to long term.

The journey of Indian retail real estate since last decade has proved to be a roller coaster ride but that has only paved way for a smooth future where meeting with road blocks and challenged shall not prove to be too much of an effort. With the retail sector welcoming changes which includes giving a thumbs up to FDI, the future is positive.

About the author

Ashutosh Limaye, Head – Research & Real Estate Intelligence Service, , India