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perspective a quar terly repor t by Volume 02 / 2009 9 | Retail Real-estate Trends | Volume 02 Introduction Indian retail and real-estate sector underwent numerous changes in 2008. Lower consumer spending, high real-estate cost and lack of quality real-estate development prompted Indian retailers to revamp their current operations by closing stores at unprofitable locations, renegotiate rentals with developers, curb spending and reposition themselves to ride through the tough times. All this has resulted in altered relationships between real-estate developers and retailers. Currently, the Indian retail industry is experiencing a steep learning curve. The industry is witnessing expansion, consolidation, acquisition; and retailers are restructuring and re-planning toward robust & efficient business models for long-term sustainability. The market is taking a ‘U’ turn from being a landlord/ developer driven market to being retailer driven. The current turbulence has been a reality check for retailers to take stock of their strategy and operations and leaves the industry in a stronger position to take advantage of the rebound. The mall space in top-nine cities (Delhi, Mumbai, Kolkata, Chennai, Bangalore, Pune, Hyderabad, Ahmedabad and Ludhiana) is estimated to be around 37 Mn sq.ft. On a pan-India level, based on the mall supply estimates for 37 cities spread across the four geographical zones of India, 2009 is expected to see an addition of around 44 Mn sq.ft. of mall space. According to Cushman & Wakefield(C&W), however, just about 41% of the supply is likely to get delivered by the year-end. Top cities in India such as NCR, Mumbai, Kolkata, Pune, Bangalore, Chennai and Hyderabad witnessed on an average 10% vacancy rates in 1Q 2009 for available space in operational malls. NCR recorded the highest level of vacancy rate of 25% in 1Q 2009 owing to sluggish retail sales and despite the shortfall in mall supply-rate. We expect that the modern retail would be back on its growth trajectory in the next two to three quarters. The demand for quality real-estate is expected to grow exponentially over the next 4 to 5 years fuelled by demand from the organized retailers. The success of retail real-estate business depends on the developer’s ability to recognize and respond to the changing consumer and market trends. As per Technopak and C&W, it is estimated that an additional 65 Mn sq.ft. of mall space would be required in these top 9 cities by 2013-14. This current slowdown in mall construction, however, is expected to keep the supply low over 2009-11. It may help in maintaining a healthier demand-supply equation in the retail-estate sector. India is getting into an interesting phase as far as retail and real-estate is concerned and we will be witnessing many world-class shopping centers being created by developers. Builders backed by the global funds and skill-sets are now well equipped to create center which can be benchmarked against the very best in the world and take Indian real-estate sector into the next orbit. Our estimates predict positive signs of growth coming through an increased demand for all segments of the retail real-estate sector. The challenge for the sector is to create properties though proper planning and differentiation so that operations can be extended over a period of time.
Collaborative Efforts Between Retailers and Developers perspective a quar terly repor t by Volume 02 / 2009 01 Lower or negative revenue growth over last year on same store basis and high rental cost of the stores added in 2007-08 have forced brands/retailers to take a re-look at their real-estate portfolio. In the second half of 2008, malls across the country saw a drop of 25% to 30% in footfalls and 10% to 15% dip in sales. Retailers are delaying their expansion plans, resizing their existing stores or are closing down stores at unviable locations. Corrections of rentals in the range of 25% to 40% across major cities and markets have been witnessed over the last 2 to 3 quarters. Retailers have become more cautious in their approach and are undertaking detailed feasibility studies before signing any new deal for taking up space in the malls. They are also negotiating with developers before closing the deal. Developers are experiencing low occupancy rates and have low negotiation power for charging high rental rates due to sluggish demand from retailers for new space booking. Mall operators and builders are looking at various options to increase profits. Big retail companies are forging revenue share arrangements and minimum-guarantee opportunities with mall owners and developers. This is expected to be the model of business relationships between organized retail and property owners in the future. The use of the revenue-share model is expected to gain momentum in the future as more and more Indian developers become corporatized. Retailers are looking at building long-term and success based relationships with mall developers. Developers are also offering greater incentives in the form of longer rent-free period, reducing fixed occupancy cost, sharing capex with retailers, concessions in rentals to prevent exit of existing tenants. Furthermore, innovative marketing initiatives such as free gift vouchers to customers with every purchase and free parking are being adopted to draw customers in the malls . Retailers are also helping developers with their operational expertise to devise strategies best fitted with the overall mall positioning and concept such as devising good tenant mix and assistance in overall mall management. It is expected that such initiatives and tie-ups would be key to success in the future with the growing realization between retailers and developers to devise models that are best suited to their financial interests. Exhibit 1 Prominent Tie-ups Phoenix tie-up with Entertainment World Developers Pvt. Ltd. and Big Apple Real Estate Pvt. Ltd. Entry of Kshitij Retail Destinations in mall management space Provogue’s tie-up with Liberty International | Volume 02 Retail Real-estate Trends | 10
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