Real estate developers are in no hurry to jump into the retail bandwagon despite the government allowing FDI in single and multi-brand retail, thanks to an already existing glut of malls and an earlier backlash on investments in such space.
In 2008, the India growth story and high purchasing power led many developers plan shopping malls, only to convert them into office spaces or even residential projects when global slowdown hit.
In the first half of this year, retail real estate market recorded a deferment of over 30% of retail mall space against the projected supply. Experts say vacancy rates in malls are as high as 20%, against 7% in 2007, adding that rentals in malls are priced on an average between R400 and R500 per square feet, which retailers feel should be around R75-100 per sq ft.
While opening up of FDI in retail did bring cheer to retail industry in India, clarity on many aspects is still awaited. States have been given the freedom to decide on FDI, and the main opposition party, the BJP, has threatened to repeal the policy if voted to power.
?A Walmart, Carrefour or Tesco would like to enter a country and not any specific state,? a real estate consultant told FE. ?Supply chain is not a piece meal sort of investment, the companies need to have a country map for taking the business forward,? he added.
Real estate developers are also not too sure about the retail format at present. ?At the moment, there are not many takers for malls among the realty players. The kind of returns we get in the business is not very lucrative and paybacks are much longer, compared with residential projects,? said Kishore Bhatija, chief executive officer, Inorbit Malls. Bhatija said that due to the lack of clarity, companies are going to wait until a few entrants come in, and then decide how to go forward. Inorbit Malls is owned by the real estate firm K Raheja Corp.
Gulam M Zia, executive director (advisory, retail & hospitality), Knight Frank India, a global real estate consultancy firm, agreed and said that the larger problem lies with the real estate requirement of big-box retailers who require 50,000 sq ft space and upwards.
?While spaces built for big-box retailers will generate a lease rental of say around R40-50 per sq ft, a residential development in a similar location will command a minimum of R3,000-4,000 per sq ft, making it perhaps more lucrative for developers,? Zia said.
Even the future supply in retail that is being planned can at best be used up by single-brand retailers. ?With real estate prices soaring in most metros, retailers may find it tough to find space in a mall,? said Mohit Bahl, partner, KPMG India. ?They can?t get more than 1,000 sq ft or so, and then one has to look at the rentals too,? Bahl said.
Also, high interest rates and leasing or purchase format in commercial real estate again makes it difficult for realtors to aggressively build dedicated retail spaces. Unlike residential segment, where customer advances aid in construction of the projects, in commercial real estate cash flows start kicking in only after the project has reached some level of completion and nowadays perhaps when it is fit-out ready.
?It will take at least a year to understand which way the FDI in retail is moving. Developers would want to be really sure of what the future for multi-brand retail is in India, before getting into it,? said Ravi Ahuja, executive director (office transactions), Cushman and Wakefield.
However, there are some developers who are willing to try the market out. Oberoi Realty, which operates Oberoi Mall in Mumbai, said it is willing to consider building more retail formats if the right commercial opportunity comes by. On the lower margins, Nirzar Jain, vice-president, Oberoi Mall, said: ?The fact also is that while the per sq ft rate might be low, the big retailer will occupy large part of the inventory.?
T Chitti Babu, chairman and CEO of Chennai-based realtor Akshaya, says that the company is in talks with two large format foreign retailers for setting up independent retail project on about three acres land near Chennai. He refused to divulge details.
