The Future Real Estate Scenario and Modern Retail

By Andrew Levermore

India is the last frontier for modern retail development. Our consumer is emerging from decades of minimal choice, restrictive legislation and stifling cultural concerns. A consumer who has always held high aspirations is now freely able to exercise his or her right to a comfortable lifestyle without guilt or judgment. Emerging modern retail formats are offering exciting customer interaction, pleasing ambience and a connection with previously unseen product. New retail formats that have taken several decades to evolve in the West are available to us overnight here. Such is the exciting scenario that our real estate industry faces.

With this scenario come certain factors unique to India and not previously seen in the world. Few of these factors are covered by any western experience or learning.

The rush to exploit the seemingly endless opportunity of modern retail sees just about anybody from any background or experience either launching new retail business's themselves or becoming shopping mall developers. Of the many new entrants into the retail business at least a third will fail dramatically in the coming years. Short term success though is almost guaranteed with little competition (only 5% of retail is currently ‘organised' hence there is currently room for many new players as market share is too easily available) As competition intensifies rapidly over the next few years the amateurs will face challenges to re-capture market share from the subsequent new entrants.

Shopping in modern formats is a mainstream leisure activity for our consumer and the novelty effect is still prevalent. As more and more choice becomes available this novelty factor will wane and the massive footfall enjoyed by the few today will be hard won by the many in years to come. The current impulsive shopper character of the Indian browser will metamorphose into a shopper who shops because she needs something specific and she will be more considerate about her choice of venue amongst the many more available.

The amateur developer may find the going tough when he realizes his multi floor mall with no credible anchor, poor upward traffic flow, low budget maintenance and insufficient parking for a more affluent consumer has left him losing the race.

Our current building and zoning legislation makes it tough for any developer to provide adequately for an attractive retail destination that will sustain the 25 year life cycle that is ordinarily necessary to gain decent returns in the shopping mall business. Firstly, our apparent lack of any effective town planning legislation permits too many malls to be built in the same zone with the ridiculous extreme being Gurgaon highway eight. A reported 23 malls being built in a 3 kilometer stretch. We needn't bother speculating if they will all survive. For a developer to confidently invest substantial amounts of money into a significant shopping destination he needs to know with a high degree of certainty what the future infrastructure plans are for the area and when they are going to happen. He also needs to know that his 1 million square foot mall will be the only one permitted in the immediate catchment. The current doubt around these factors is one of the reasons for the greedy rush that is taking place. Our landowners and developers can't wait 25 years for good returns as the future is completely uncertain. Hence they acquire, design and build as quickly as possible.

The letting of many malls is a haphazard process carried out at the same greedy pace. Little or no thought is given to winning an anchor tenant who will last the distance with an aspirant consumer over the next 25 years. Careful and professional consideration of the rest of the tenant mix and their adjacencies in the mall will sustain the development against weaker competing venues. Increasing affluence will require much more parking than is currently allocated today. Our developers are unable to adequately provide for this as our legislation includes parking in the floor space index restrictions. Quick returns are critical before competition and increased consumer selectiveness leads to failure of some.

These are just some of the reasons for the chaotic frenzy of current retail real estate development. In some cases this frenzy has lead to bizarre schemes where a developer ‘sells' his mall to the retailers. Sustenance of a shopping mall requires professional management of maintenance, security, marketing and tenant mix management. This cannot be done in the long term by the equivalent of a housing society cobbled together by the individual retail owners of such malls.

With the above in mind, our developers have lost sight of the complex pricing mechanism that is an essential part of a successful mall. The current insatiable demand of modern retail is grossly outpacing the available mall space. This has led to some rental prices that would out do malls in the US. Some of our retailers are fueling these prices in their rush to acquire space in order to ‘block' competition. In some cases mere words of intent for massive demand from a new retail entrant is enough to double asking prices.

A profitable shopping mall is a careful arrangement of retail offering. The most important part of this arrangement is the anchor tenant.

It is the anchor who is the ultimate footfall driver. Without an anchor who is in the game for the long run with a format that is a destination in itself the mall will succumb to competitors with stronger anchors. Signing the very best anchor is a strong driver of subsequent retail tenant demand. Smaller players will pay for the guaranteed footfall that the right anchor will bring. With much greater destination choice available to the consumer in the future, the anchor will also determine the malls' customer profile. An up market anchor will attract up market customers and consequently up market retail tenants will demand space. Conversely if the requirement is for a lower end customer profile because of the catchment demographics then the best discount operator will attract tenants of the same ilk.