Unsold, vacant, no takers?these words aptly sum up the story for real estate developers into malls in India. Even though retailers are spreading their wings once again after the slowdown, the absorption of malls remains sluggish, leading to high vacancies.
Real estate consultant Jones Lang LaSalle (JLL) India pegs the vacancy levels across Indian malls (in top seven cities of Mumbai, NCR, Bangalore, Kolkata, Chennai, Hyderabad and Pune) at about 17-18%. And just like unsold residential inventory is piling up the most in NCR and Mumbai, the two regions also top the list of vacant malls.
Sample this: As per Knight Frank India, the total vacancy rate of malls is as high as 30% in NCR, while in Mumbai it is 10-12%. In southern markets, though the vacancy rate is pegged at 15-18%, the supply pipeline is not very high, making it a better market. Further, the real estate consultancy projects that of the 90 malls expected to be developed in the country this year, only half would be absorbed. The balance 50% are likely to struggle for occupants.
Pointing at the high vacancy levels of malls in Delhi and Mumbai, the head of research at JLL India, Abhishek Kiran Gupta, says high vacancy levels in these two markets are due to poor location, poor design and poor parking facilities. ?There is a terrible polarisation in malls today. Some are operating at 100% occupancy, while others are struggling at less than 30% occupancy. Take the case of a prime developer?s retail asset in Greater Noida, which has poor occupancy, whereas Great India Place Mall in Noida?s Sector 18 is operating at near full occupancy.?
The vacancy levels remain alarming even though the transaction volumes have increased. Total transactions in malls across the top seven cities in India were about 3.8 million sq ft in 2009, whereas 2010 clocked around 4.5 million sq ft of transactions in malls, a 20% increase over the previous year.
And, the malaise of high vacancy can be seen in micro markets, such as Ghaziabad and Lucknow, where retail has not picked up. ?Clubbing this with the fact that spending was really low for around 14 months, the demand for malls is likely to remain soft for about a year,? feels Shobhit Agarwal, director, Protiviti Consulting.
The dynamics have changed too, with a shift towards revenue-sharing model between the developer and retailer. Brands, including Pantaloons and Shoppers Stop, are increasingly opting for a revenue sharing model as against fixed rentals, as it helps them lower the risk.
?The revenue share model has improved things for mall developers when it comes to finding tenants and such malls have an edge over others,? says Rituraj Verma, national director-retail agency, Knight Frank India.
A Delhi-based real estate developer, on the condition of anonymity, says ideally they want a mix of outright sales, lease and revenue sharing, but developers have to bow down to retailers, especially in localities that are not so good.
However, Gupta of JLL is more optimistic. ?Right now it is beneficial for retailers, but in the future, when footfalls in malls are expected to increase, developers will also benefit from the retailers? revenues increase,? he predicts.
For retailers, it?s a tough choice. They agree there is enough supply in the market chasing them, but feel that finding a well located mall with a suitable rental model is difficult. ?We are open to both fixed rental, as well as a revenue sharing model. Malls benefit retailers more in tier-II and III cities than in metros, where brands have no problem attracting customers from their own premises as well. However, in tier-II and III cities, major brands prefer to first test out the market via these platforms since local operators are better at capitalising on local market dynamics,? says a Future Group official.
So it?s not surprising when a consultant points out that brands prefer high streets than malls in metros, where fixed rentals have gone through the roof and are not in tandem with the sales, which is perhaps the sum of the story for retailers.