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Saturday, February 11, 2012

High Street back with a vengeance

An edited version of this story first appeared in DNA Money edition on Wednesday, February 8, 2012.

India witnessed addition of over 15 million square feet (msf) of organised retail mall space across primary and secondary locations in the calendar year (CY) 2011. Interestingly, approximately 60% of the overall space i.e. more than 9 msf was added in the period between July-December (H2) 2011.

And according to a CB Richards Ellis (CBRE) report, more than 90% of the entire organised mall supply during the review period was led by cities like Mumbai, Pune, Bangalore and Chennai.  The CBRE study reviewed retail real estate developments in seven cities including NCR, Mumbai, Bangalore, Chennai, Hyderabad, Pune and Kolkata.

Anshuman Magazine, CMD, CBRE South Asia Pvt Ltd, said the increased retail activity across key cities is an indication of the growing confidence of both domestic and international retailers in the India growth story. “On the back of growing urbanisation and an increase in the acceptance of organised retail, retailers have been expanding their operations across the country. The government allowing 100% FDI in single brand retailing has been a welcome step, however the caveats put by the government like making it mandatory for retailers to source 30% of their requirements locally are a dampener,” he said.

Presenting a promising outlook based on considerable increase in retailer inquiries, the report further said that retail mall rentals witnessed growth in prime city micro markets. However, the rental were stable in suburban (supply laden) destinations in key cities like NCR, Mumbai and Bangalore. A few micro markets of Pune, Chennai and Hyderabad witnessed correction but only with select mall developments.

While CBRE expects a significant increase in the transaction activity and size as a result of anticipated incremental demand, the experts also envisage a possible downside owing to large, retail mall supply pipeline in most leading cities. ‘This might lead to a demand – supply mismatch which might eventually lead to long-term pressures on retail rents in select micro markets’, the report said.

In fact, pressure on retail mall rentals has started showing up in a select few categories already. The developer of the recently launched Phoenix Market City Kurla was faced with the challenge of leasing the multiplex space in the mall. Industry sources said that, while PVR Ltd was initially approached by the mall developer for the multiplex lease, the film exhibition company (PVR) turned it down citing higher lease rentals.

“Eventually, a deal was inked with Reliance BIG Cinemas. However the multiplex chain walked out of the deal at the time of taking delivery as it felt the lease rentals were on the higher side. The mall developer then re-approached PVR with a mutually workable lease rental rate. PVR is currently in the process of getting the multiplex ready for launch which is likely to happen within the next few quarters,” said the source familiar with the development.

The general feeling in the retail sector is that while re-negotiations haven’t started yet, the process is likely in the first quarter of financial year 2013 (Q1FY’13). “Retailers who have already negotiated rates will take stock of the market situation by the end of current fiscal. Given the current economic scenario with financial standing of real estate companies, it is very likely that retailers will discuss rentals which will lead to some correction in the market. Having said that, high street locations will continue to enjoy a premium,” said a top official from a leading Indian retail company.

Echoing the sentiments, Pankaj Ahuja, proprietor, Rapid Deals (a Mumbai-based real estate consultancy firm), said rate negotiations are not happening in the established malls operating in south central and western suburbs of Mumbai. “However, some of the new mall developments that are not fully operational are facing challenges with lease rental rates. I wouldn’t be surprised if some of them take to reducing the rentals per square feet in an attempt to fill the retail space,” he said.

The quality of retail real estate is another problem faced by the Indian retail industry. A recent report by the research and real estate intelligence service of Jones Lang LaSalle (JLL) India cited that while substantial mall space is being built, only half of it is worth a second glance from retailers.

Ashutosh Limaye, head - Research and Real Estate Intelligence Service, Jones Lang LaSalle India, said in the report , “The trend is not confined to Mumbai as almost all cities in India are witnessing it. We are still stuck with the mistakes we made three or four years ago - jumping on the bandwagon and creating too many malls without reason. Few understood that building and running malls is a science, and that factors like catchment viability, location, supply benchmarking and mall management matter in their success.”

JLL estimates that 2011 saw a retail real estate supply of 13.8 million square feet hit the market, with 10.7 million square feet getting absorbed – it amounts to 130% of the figures for the years 2009 and 2010 put together.

With delays in completion and few retail-conducive projects being launched, it is malls, malls everywhere and nowhere to go for retailers. “Retailers have finally decided that enough is enough and have started scouting for stand-alone properties. With their eyes on old mansions, mixed-use buildings and small office blocks in established as well as emerging locations, big-format retailers and giant chains are mandating property firms to broker these deals for them,” said Limaye.

So while high streets were never out of form, they are now back with a vengeance. Properties which, with retrofitting, can enable retailers to start selling in no time at all are fast becoming precious assets for big retail companies. Even constructing glass cubes on plots that house the 'building next door' is seen as preferable over having to wait for properly located and configured malls to come along.

“In the world of retail, stagnation is the same as dying and these retailers have no intention of slipping into a market-induced coma. Moreover, these stand-alone stores are the perfect way of giving shoppers a personalised experience that many shopper often find missing in malls,” said Limaye.

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