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Key Retail Real Estate Trends 2013

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According to research emanating from the 6th edition of Malls of India released in September 2013, there was about 470 operational malls in India as of Q3, 2013, with a combined Gross Leasable Area (GLA) of about 129 million square feet. The report further estimates that 250 malls are to come up by 2016, adding a cumulative GLA of about another 77 million sq.ft. This will take the total GLA in the country to 206 million sq.ft. across the 720 malls that India will have by 2016. Within the last two years, the mall count has grown by 28 percent per annum, and the retail space in malls has also grown by a healthy rate.

While year 2013 was tough on real estate in general in India, buffeted by twin pressures of restricted liquidity and spiralling construction costs on account of inflation, there were many positives as well. A key trend is the rise of tier II cities, as evidenced by several shopping centre openings this year. Fashion and lifestyle continue to be high growth, while a landmark year for cinema pulled more Indians into multiplexes than ever before. Here’s our take on the key trends of year 2013…

The Liquidity Bind

A monetary tightening resulting from RBI’s measures to control spiralling inflation was the major macro influence on the real estate business in India through most part of the year. High interest rates, an increase in vacancy and lower margins arising from inflationary pressures to led to a slowdown of construction activity leading to fewer new launches, and also delayed project delivery, though primarily for developers with significant outlays in the residential sector. Some analysts even went as far as to compare the scenario with the post-Lehman Brothers crisis days of 2008-09.

Developers with exposure to residential projects are particularly floundering, with slowing sales leading to a situation of oversupply in many parts of the country.

And this slowdown and a dull sentiment was evident in the shopping centre business as well. With most developers facing a liquidity drought, construction was slowed across many projects. As many as 13 malls were deferred in the top eight cities of the country during the first six months of 2013 as developers were either cautious or facing cash crunch, property consultant Cushman & Wakefield (C&W) said. “The top eight major cities witnessed a total mall supply of 2.94 million sq.ft. (3 malls) during the first half of 2013 with over 64 percent (13 malls) of the total expected supply deferred,” C&W said in a statement. The national capital region (NCR) witnessed the deferment of five malls, followed by two in Pune, Hyderabad, Chennai and one each in Kolkata and Bangalore.

The REIT Revival

At a time when the real estate sector is reeling under liquidity crunch and poor sales, the Securities and Exchange Board of India (SEBI) also revived the process of introducing real estate investment trusts (REITS) in the country.

REITs were introduced in the US during the mid-1960s as a means of providing small investors the opportunity to participate in the benefits of ownership of larger scale commercial real estate or mortgage lending. They gained popularity due to the fact that income distributed is not taxed at the REIT entity level.

In view of the crucial role that REITs could play as an investment vehicle, the SEBI brought out draft REITs regulations in December, 2007 to encourage and facilitate a healthy growth of REITs in India. However, these regulations could take shape due to a number of facors, including the global economic slowdown, which also impacted real estate markets.

In a welcome move, SEBI once again brought out Draft REITs Regulations, 2013, which were made public on October 10, 2013 for inviting stakeholders’ views.

According to the proposed regulations, REITs in India will be registered as trusts with SEBI. These trusts will not be allowed to launch any scheme. REITs, which will raise funds through initial offers, will have to list their units on exchanges for trade. They will be allowed to raise additional funds through follow-on offers as well.

To ensure that only established players launch REITs, the minimum size of assets under management has been proposed as Rs 1,000 crore. Initially, the minimum investment size be Rs 2 lakh, which may keep retail investors away from this new market. At least 90% value of REIT assets should be in ready properties generating revenue. The remaining 10 percent can be in other specified assets. REITs will have to distribute at least 90 percent of their net distributable income after tax to investors.

Vacant and agricultural lands are proposed to be kept out of the reach of REITs, which will invest only in Indian assets. The draft regulations include several conditions that REITs will have to follow.

While there may be some distance to go before India develops Retail REITs as they exist very successfully in the US (Taubman, Simon, General Growth and Macerich are among the top retail REITs in the country, with hundreds of mall under operation) REITS are expected to bring in better practices, transperancy and higher corporate governance for the real estate industry as a whole.

The Democracy of Design

Stunning visuals are no longer the territory of large metropolitan centres. An array of spectacular architectural marvels across the shopping centre space displays the blurring of boundaries in marrying great mall design to catchment profile. From Mangalore City Centre, which opened in 2011 to World Trade Park in Jaipur, Trillium and Elante in Amritsar and Chandigarh respectively, tier II has risen emphatically. And why not? If fashion, lifestyle, foodservice and entertainment are unifying Indian aspirations, the venues that they are housed in should be equally democratic in appeal.

With international mall design specialists from the US, UK, Australia and South Africa, among others, being stakeholders in India’s shopping centre evolution, the pitch has clearly been rising and all mall openings in 2013 were testimony to the democratisation of high-voltage experimentation, innovation and architectural finesse across markets.

Cinema Remains Strong Currency

Multiplexes account for just eight percent of India’s 12,000 screens but rake in a third of total box office receipts, according to the Single Screen Association of India and a report by KPMG and the Federation of Indian Chambers of Commerce and Industry (FICCI).

Bollywood celebrated 100 years this year, and showed it off with some spectacular numbers. With as many as seven major successes from the world’s most prolific cinema factory this year, Hindi movies – a great leveller in India — continued to emphasise their role as a crucial anchor of shopping centres across the country.

With Bollywood films crossing the Rs 100-crore mark faster than one say SRK, Indians have apparently fallen back in love with the big-screen theatre experience, and not soon enough. A steady stream of superhits and blockbusters as defined by the film trade, Chennai Express, Yeh Jawaani Hai Deewani, Krrish 3, Aashiqui 2, Bhaag Mlkha Bhaag, and the latest, Ram-Leela, rung in a very happy year for cineplexes’ coffers, with positive spin offs accruing to foodservice and entertainment tenants.

The symbiotic relationship between malls and multiplexes in India, if anything, was strengthened this year, with both feeding off each other, thanks to the universal appeal of mainstream Hindi cinema and a particularly lucrative year for popular celluloid dramas