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Tracking investments in the Indian retail and real estate sector

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India’s rapid urbanisation and the structural shift in processes and reforms have given a strong fillip to growth in the country.While the country still deals with unequal growth in urban and rural areas, the overall increase in spending power and rising aspirations of its large middle-class population has spurred a retail revolution of sorts.

The superlative growth in the retail sector in India is an ode to the country’s domestic consumption strength.

With a 1.3 billion population, we are the world’s second biggest market for everything under the sun. Having transcended the socalled ‘Hindu rate of growth’ till 1990, liberalisation virtually opened the doors of the country. In the years to follow, through ups and downs, the country has remained on a steady growth curve and a stable and proactive regime at the centre has lorded over a period when India has been the fastest growing country globally for the past year or so.

Interestingly, India is poised to grow at a similar scorching pace of over 7 percent in terms of GDP when the global GDP growth is pegged at just 3.9 percent. India’s rapid urbanisation and the structural shift in processes and reforms have given a strong fillip to growth in the country.

While the country still deals with unequal growth in urban and rural areas, the overall increase in spending power and rising aspirations of its large middle-class population has spurred a retail revolution of sorts. India’s growing middle class which now constitutes about 50 percent of the total population, its young demographic with over 58 percent of the population in the 15-54 years age bracket and a median age of 29 years along with growing prosperity and a corresponding increase in aspirational consumption has caused a retail revolution in the country.

It is no wonder then that the retail industry has grown to be one of the largest in the country, contributing over 10 percent to the GDP and employing 8 percent of the country’s total workforce.

India is now ranked number 1 on the , up from number 2, outlining it as the hottest retail destination globally. The potential can be gauged by the fact that the share of organised retail in India still remains just around 10 percent of the nearly US$ 780 billion Indian retail market.

The gigantic though nascent boom of the e-commerce retail sector has spawned another growth avenue in the retail sector. The potential in online retail is even bigger with rising Internet and smartphone penetration with convenience in the Tier 1 cities and access to brands in tier 2 and 3 cities being key drivers for growth of this segment. Online retail sales stand at just US$ 32 billion (just around 4 percent of the overall market).

As per various industry estimates by leading consulting firms, India’s retail market is expected to be a US$ 1.2-1.3 trillion market by 2020-21 with share of organised retail for the brick-and-mortar and e-commerce formats slated to nearly double over the corresponding period. It is therefore no wonder that the current dynamism prevalent in the sector has brought in its wake a spurt of global retailer entry, private equity money chasingreturns on retail assets and the e-commerce phenomenon has resulted in the entry of multibrand global retail giants and mushrooming of home-grown unicorns and fast-growing firms, especially in the apparel, consumer durables, electronics and home furnishings space.

India’s organised retail physical space market size

It is also quite interesting to note that over the past nearly two decades, India’s organised retail sector physical foot print has grown from just under 1.5 msq.ft in 2001 to 78 msq.ft by end of 2018 across the top eight cities of India, a CAGR of 24.6 percent.

It is also interesting to note that across the next 38 major Tier II & III cities of India, the operational stock adds another 42 mnsq.ft, taking India’s total organised retail footprint to around 120 mnsq.ft across its major cities.

It has now been established that successful malls may not be restricted only to the big cities. Smaller but economically strong cities also have the appetite to handle at least a couple of successful and high-grade retail projects.

Tier I cities include Mumbai, Delhi NCR, Bengaluru, Chennai, Hyderabad, Pune, Kolkata and Ahmedabad.

A liberal FDI regime in the last five years, the presence of successful and established retail malls, rising income and consumption levels and a need for diversification of their India real estate investment portfolio has seen a spurt of private equity activity in the Indian real estate space.

It has been an added incentive that mall space has risen in the major cities over the past decade and select malls have clocked impressive sales performances for private equity to look at this asset class. In fact, majority of the funds have been invested in retail in the last five years or so and what has been interesting has been the fact that PE firms have employed very distinct investment strategies when investing into the retail space.

Most of the large and active funds in the Indian real estate space have made strategic investments in the retail sector as well. The likes of Blackstone, GIC, CPPIB and Xander readily come to mind. The graphic below highlights the investment strategies employed by the major PE players in Indian retail space.

Private Equity-Physical Retail dynamic

What is interesting to note is that of India’s current operational retail malls, only around 50 percent is held under single ownership. This also translates to around 62 percent share of such malls in gross leasable area terms.

This is symptomatic of the gap and consequently the investment opportunities that exist to create quality retail developments across the country.
Here is what is driving enhanced retail mall performance and consequently resulting in increased private equity interest in this asset class.

Investment and Industry Trends in organised Indian Retail Trade

No discussion on global investments in Indian retail sector can now be complete without mentioning the e-commerce explosion in Indian which has transformed the retail and shopping fabric of the country. Coming on the back of increased Internet and smartphone penetration, India’s online retail sales have seen a quantum jump in the last couple of years. Additional events such as demonetisation which caused a massive structural shift in the digital payment space and e-wallets, have also played their part in Indians taking to the online shopping space.

The deep discount models and emergence of Indian unicorns and entry of global giants like Amazon spawned a whole generation of online-only retail formats especially in the apparel, electronics and lifestyle segments.

India’s retail sector has seen a spate of M&A and inbound and outbound investments which has made the retail space a very active one over the last 3 years or so.

As per data by PwC, a cumulative INR 324 billion worth of transactions have been recorded for FY 2016-2018 across M&A and foreign and domestic capital investments for both inbound and outbound deals. During this period, a total of 416 such deals were announced and recorded.

Total fund flow in Indian Retail Trade sector FY16-FY18

What is interesting to note is the mix of the transactions in terms of retail segments. F&B by far seems to be the most in vogue segment in terms of activity and investments. Consumer Services were the second biggest retail trade category which saw major action, while the consumer durables and apparel categories with their lifestyle and aspirational qualities driving growth for them, have also seen a healthy amount of business and fund flow activity during the past three years.

With respect to pure PE deal flow in the retail trade sector, we have seen cumulative inbound capital flows of INR 1468 billion from FY 2016 till date for FY19.
While the initial years were average in terms of performance, the recent transaction of Walmart’s stake acquisition in Flipkart has been the chief contributor to the overall volumes with this single transaction accounting for USD 16 billion alone.

Rather than an anomaly, this should be looked at in terms of how the Indian e-commerce space has come of age. With the lines between online and offline blurring to merge in to an Omnichannel retailing strategy, India’s retail sector is poised to grow at a scorching pace with likelihood of more such investment opportunities being snapped up by interested investors.

We expect that more such acquisitions are in the pipeline from global players eying the Indian consumption pie, with Amazon seeking the right opportunity and Alibaba also continuing to invest as it looks to enter the Indian market in a big way.

We have listed below some of the landmark transactions in the Indian retail trade category over the past four years to illustrate the opportunity that this sector presents to investors across the value chain.

We are in for exciting times in the Indian retail sector with the physical retail space attracting private equity and patient capital for core as well as build-to-core opportunities across major Tier I, II & III cities, even as quality retail space has high occupancy levels making it difficult to secure quality retail space amid increasing size ofthe consumption wallet with growth becoming broad-based.

The world’s fastest growing economy, digital penetration and favourable demographics with the world’s youngest population just add the cherry on the cake for retailers as they rework and strategise to put their best foot forward to serve the varied essential and aspirational needs of the Indian consumer.