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Indian Real Estate: Today, Tomorrow and the Way Forward

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Opportunities and challenges exists hand-in-hand in the Indian retail real estate market that has grown steadity over a past decade and seems to consolidate in the way ahead. In order to build successful shopping centres, mall developers have to look at them beyond an asset class of property.
Retail Overview: Supply, Pricing and Rental Trends
The retail real estate market in India has developed steadily over the past decade as the quality of stock has improved and local developers have realised the importance of modern shopping centre management such as zoning, branding, marketing and promotions, as well as the all-important strategy of following a pure lease model instead of the earlier practice of divesting units to individual investors. This evolution has led to the creation of a number of high-quality shopping malls in major cities such as Delhi, Mumbai and Bangalore, which have set the benchmark for future retail schemes.
The adoption of rental models in India such as revenue sharing has provided support to the retailers seeking to establish themselves in the Indian market and also enabled mall developers to attract international and domestic retailers to set up flagship stores in the country.
In the run-up to the global financial crisis of 2008, around 300 new shopping centres were scheduled to be completed in key cities of India. However, this pipeline did witness stagnation with the credit crunch, leading to a shortage of modern retail stock. In 2011 the development pipeline sprung back to life as construction work resumed on a number of projects.
As at the end of 2012, the supply of modern retail space across the country’s seven largest cities stood at about 52 million sq.ft., around 70 percent of this space is in New Delhi, Mumbai and Bangalore. Leading cities including New Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad and Kolkata have seen a steady rise in retailer enquiries in the recent years. Shopping mall rents in prime submarkets of New Delhi have witnessed growth, whilst values in high streets have increased in Mumbai, Bangalore and Pune.
Transaction activity and size are expected to increase on the back of increase in consumer spending and expanding mid-income purchasing power. In Mumbai, premium international brands continue to focus on affluent southern parts of the city, but the lack of quality retail space remains a major challenge to growth. Despite the scarcity of quality supply, most retail chains continue to launch their first Indian store in Mumbai – usually in a street shop – before expanding elsewhere. Domestic big-box retailers are gradually expanding to tier II locations, but the major foreign names remain primarily focussed on tier I cities. New supply is steadily coming on stream in the NCR and will provide opportunities for retailers to operate in an organised retail environment. High-street formats continued to dominate the retail landscape, whilst most luxury retailers preferred to operate from five-star hotels and premium malls. Bangalore has a large quantum of organised retail supply in the pipeline which will provide retailers with further opportunities for expansion.
Rents for prime retail space have recovered steadily after suffering a dip in 2008-2009 as supply has not kept up with demand. Although high streets such as Khan Market and Connaught Place in New Delhi, Linking Road in Mumbai and Brigade Road in Bangalore continue to command a premium due to their favourable locations, most international retailers desire larger floor plates, back-up power systems and a modern retail environment. As a result, there has been an increase in demand for space in the shopping malls.
Activity from domestic retailers, particularly in tier I locations, slowed slightly over the course of 2012 and many groups have adopted a wait-and-see strategy amid increasing competition from international groups and the slowing domestic economy. However, domestic groups still account for the bulk of new take-up. Despite a high rental spectrum, major cities continue to witness gradual expansion by international luxury goods, apparel and F&B retailers. Recent quarters have also seen a number of well-established international mass market brands entering tier II locations, partly due to the lack of space options in tier I markets. Additional new entrants are likely in the coming months.
International F&B outlets have continued to expand in 2012, both at the fast food and fine dining end of the market. Luxury retailers remain focussed on tier I locations but continue to refine their strategy and product offering for the Indian market, which in selected cases has seen them consolidate and reduce the size of some stores. Fashion remains a high growth sector and major apparel brands from the United States and Europe continue to seek opportunities to enter or expand in major markets across the country, including some tier II locations. Domestic home furnishing companies and supermarkets also remain in an expansion mode.
Challenges Faced by Retailers
There is approximately 52 million sq.ft. of retail stock in India spread across leading metropolitan cities and their surrounding regions. However, even after the steady growth in supply of organised retail space over the past 10 years, retailers of the size of Ikea or Walmart often find it challenging to secure space in a prime mall in any of these cities. This is essentially because the majority of retail space developed in India to date lags behind global standards and does not provide the quality, ambience, design, services and post construction maintenance that global retailers are accustomed to. This is one reason why out of the more than 300 malls in the country only a handful can be described as successful retail projects. The total size of these successful malls is just 4-5 million sq.ft.
According to Technopak’s “Opportunity India” report, India will require an annual supply of about 20 million sq.ft. of organised retail space in order to sustain growth in the sector. This will necessitate a concerted effort from developers to construct successful shopping centres to global standards. However, domestic developers are still in the middle of a steep learning curve with respect to undertaking shopping centre development. Many developers view shopping centres simply as another asset class of property and no different to building offices or residential units. In fact, shopping centres have an organic and perpetually changing quality and need to be carefully planned, developed, owned and managed as a single property.
Opportunity for Mall Development
It is in this context that the role of global retail chains such as Walmart, Tesco and Ikea will be crucial. These retailers possess extensive experience of running successful retail stores and properties in markets such as the US, China, Europe, Middle East and South East Asia with local partners to create successful shopping formats. By utilising this knowledge, they will be able to help usher in a revolution in the development of organised retail real estate in India. Success factors for a retail mall in India include:
Planning and Design: Developers must conduct initial feasibility studies taking into consideration the demographics in their catchment area, the targeted consumers’ behaviour and the prospective retailers’ preferences and expansion plans towards their proposed projects before they commit any investment funds. The macro-economic environment of a particular location, its prospective growth and purchasing power of key catchment zones must be studied before selecting the ideal location for development. The design must take into account circulation, store visibility and an understanding of the shopping behaviour in the mall to structure the tenant mix accordingly.
Zoning and Tenant Mix: It is essential to plan and zone the mall in a manner so that all tenants belonging to the same category are positioned together. This is essential from the point of view of customers, who wish to compare stores, products and offerings. Such an approach is inline with the manner in which most traditional high streets are structured in India, with shops selling a particular product range clustered together and those selling other products such as apparel clustered separately. Trade mix and tenant mix planning helps create synergies to benefit consumers, thereby leading to enhanced footfall.
Ownership Strategy: Developers should hold their projects in single ownership so as to pro-actively control their tenant mix and trade mix. It is extremely important to follow a “lease only” model in a retail centre as this helps developers control tenant positioning and manage common areas more effectively. Many developers tend to view malls as just real estate and as an investment from which they wish to achieve a short-term profit. However, the desire to sell a portion of the mall on a strata title basis means the builder does not maintain the facilities properly and enables investors to resell their shops, which ends up ruining the tenant mix. In order to achieve a more balanced and synergised trade and tenant mix developers require knowledge of shop alignment by industry or market positioning. Proactive tenancy leasing, screening and management are also essential.
Retail Management: Professional mall management requires providing quality services to customers. Developers should consider the entire shopping centre as a single entity and work on improving footfall and revenue streams for all zones and locations within the mall. Successfully managing a mall involves understanding of shopping behaviour, analysing footfall and revenue across the property and launching initiatives to attract business and improve the image and marketability of the property.
Location and Accessibility: Although no longer an exclusive success factor, location and catchment are of crucial importance to mall revenues. Shoppers in India are still willing to travel long distances to visit shopping malls offering them an attractive shopping experience but the mall should be positioned within or next to an appropriate catchment area for its target customers. In New Delhi, shopping malls built in proximity to operational metro lines with easy accessibility witness more footfall than those built in suburbs with less comprehensive public transportation access.

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