Home Research India’s Retail Realty: A changing face

India’s Retail Realty: A changing face

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Since 2011, Indian retail industry has witnessed record supply and absorptions of mall spaces in India. Thereafter, there has been a slow growth of the sector due to the overall GDP slowdown, weaker consumer and investor sentiments. Recently, there has been rationalisation of mall space, particularly in NCR and Mumbai Metro Region. Poor quality malls are either being converted into places for other commercial usage or are being downgraded to lower level shopping centers. This resulted in negative supply in 2016. Future years look promising with a healthy supply pipeline and robust absorption figures.

More Developers are Maturing

– In the past, many developers entered into the retail space and constructed malls without detailed understanding of the dynamics related to the sector. As a result, either the product was poor which led to weak demand for retailers, or the selection of location and catchment area was not appropriate. This constrained the scope for success in these malls and became a reason for the dichotomy that was observed in the sector.
– In current times, poor quality malls continue to struggle for survival whereas malls of superior quality continue to attract demand from prominent retailers in both domestic and international category, and successfully draw people in.
– Developers who opted for appropriate locations with good visibility and strong catchment area tasted success.
– Developers who invested in mall management and tenant mix (two essential factors) succeeded, whereas the others who failed to the get the right formula in action performed poorly.
– Developers have now learnt from their past mistakes and now only experienced developers are constructing malls.As a result the percentage of future supply (which is expected to be of superior quality) is greater than the percentage of the existing stock.

Asset Quality – wise Breakup
– Future Supply Pipeline of 5 years (2018- 2022)
– 90 malls project (34 million sqft)

Grade Wise Mall Vacancy

The differing vacancies amongst different grades reiterates that the good quality space continue to gain traction whereas the poor-quality assets shall continue to struggle. Gradual rationalisation of mall spaces help in showcasing the actual vacancies in cities.

Factors Determining the Success of a Mall

The three factors determining the success of any mall are as follows:

Product – Mall design makes a difference with internal ease of access, appropriate positioning of stores, and strategic positioning of escalators and elevators
– Malls which follow the lease only model tend to perform better as it becomes easier for asset quality control and mall management
– Catering to a varied tenant mix draws in crowds to the mall with keeping visitors Interested. Good mall management plays a crucial role
– Adequate parking area is a key in a successful mall.
Frequent events and promotional activities improve the scope of walk-in

Catchment – Size of the residential population must be looked at, targeting densely populated areas before constructing a mall.
– The income profile of the target catchment is another important factor to study before a mall comes up with a launch strategy
– Accessibility is another key factor, as the mall should be conveniently located
– All successful malls generally have excellent frontage and visibility
Developers will also have to identify whether they would like the mall to cater to people in commercial districts, residential districts or a mixture of both.

Customer Experience – Shoppers are increasingly chasing experiences, not just merchandise. They are also getting more tech-savvy, time constrained, aspirational and upwardly mobile. Retailers experimenting with newer formats are adopting technology to engage shoppers. Newer formats effectively use technology for in-store experience, faster check-out, better displays and digital trial rooms.

Increasing adoption of minimalistic store design, light-weight modular fixtures, and focused lighting. Space share of experiential retail – restaurants, cafes, QSRs, theme-based entertainment etc. has gone significantly up over last five years in the top malls Experiential retail enhances repeat visits, provides a solid moat against e-commerce which can only offer merchandise. Examples include , , , , , McDonald’sMcCafé

Investors Interest in Real Retail Estate

PE funds have been very active over the last two years in acquiring equity/debt in retail properties across Tier 1 and Tier 2 cities.

Considering the past few years we see that:
– There has been increased private equity interest in key leasehold retail assets across the country.
– A leasehold retail property usually has a higher probability of success as the developer is actively involved in the key functions of mall management, especially tenant management.
– Various new regulations like easing foreign investment for single-brand retailers, longer shopping hours and an updated framework for establishing real estate investment trusts (REITs) have attracted the attention of various private equity funds

Recent PE Deals During the Period 2015-1H18
2015: Blackstone acquires two retail assets of Alpha G:Corp in Amritsar and Ahmedabad respectively for around INR 800 cr.
2016: Blackstone had bought a 1 million sq. ft. retail mall (adjacent to the office tower in Seawoods), from L&T Realty for over Rs 1,400 crore.Blackstone bought stake in Pune- Westend mall, Aundh for Rs 600 crore. Singapore government owned GIC bought 50 percent stake in Viviana Mall in Thane, on the outskirts of Mumbai, for over Rs 1,000 crore.

2017: Virtuous Retail (Xander Group and Dutch pension fund APG retail platform), bought North Country Mall – a retail property in Mohali, Punjab for Rs 700 cr. ($109 million) from SUN-Apollo –JJ Gumberg.
Blackstone arm bought Chandigarh’s Elante Mall (along with the office block) for an estimated `2,200 crore. GIC bought 33 percent stake in DLF commercial portfolio arm for Rs 8,900 crore, which included DLF Emporio and Promenade malls in Delhi NCR.

2018: Island Star Mall Developers Pvt. Ltd, a JV of Phoenix Mills Ltd and (CPPIB) has acquired a land parcel in Hebbal, North Bengaluru for `650 crore from L&T Construction Equipment Ltd. Blackstone bought 85 percent stake in Nitesh’s Pune mall for Rs 300 crore. Blackstone has invested about Rs 250 crore ($39 million) for a 75 percent stake in retail space Esplanade Mall in Bhubaneswar.

Virtuous Retail, APG -Xander JV has purchased stake in North Delhi Metro Mall in NCR for Rs 350 crore,while the total investment would go up to Rs 800 crore. The Phoenix Mills’ subsidiary has entered into an agreement to acquire an under-construction retail development in Lucknow for Rs 453 crore. Phoenix Mills Ltd on Friday said it has acquired an under-construction mall at Indore for Rs 234 crore.