Retail Push: Opportunity For Commercial Property Developers In ...

Property developers and retail majors in India had been eagerly waiting for the government to further open up the retail sector to foreign direct investment (FDI). Now that it?s finally done, it is expected to throw up an unprecedented opportunity for developers in tier-II and tier-III cities. Past experience of witnessing a windfall when the floodgates were thrown open for single brand, have made developers bet on the move to open up the multibrand sector for foreign players for a quick turnaround in their overall fortunes. The policy now permits FDI of up to 51 per cent in the sector, which is likely to boost the retail real estate market with the entry of international brands, practices and technologies. Back-end retail infrastructure, such as logistics and warehousing (both of which are critical growth catalysts for the retail sector), will receive a significant boost from this policy, as 50 per cent of the total FDI into the retail sector is directed at these segments. The timing of this approval is particularly important as it has come at a time when business sentiments had taken a beating, GDP growth is near a decade low and inflation remains high. It promises to help the economy as a whole to gain momentum, depth and size, while creating great employment opportunities. Navin M Raheja, chairman and managing director, Raheja Developers, told FC Build, ?From the real estate point of view, entry of foreign retail giants will open up multiple opportunities in the medium to long term, as the demand for quality real estate would rise. It will also provide a sort of bail out option to some cash-strapped retailers. With flow of fresh investment into the retail sector, it will trigger investment in real estate both at the front and back-end. In the front-end, retail store spaces will see investments and in the back-end, better quality warehouses could be seen.? At present, vacancy in malls across the board ranges between 15 per cent and 20 per cent. Opening of FDI in multibrand retail would cartainly improve the uptake of present vacant retail spaces and vacancies should improve by at least five to seven per cent in the next two to three years. There should be an increase in demand for commercial real estate and increased investor confidence, as at present there is a mismatch in lease rates and capital values. All this would motivate developers to build quality shopping centres with a clear vision to long-term profit, said Raheja. Prodipta Sen, executive director, Alpha G Corp, said property developers would now get enormous opportunities to grow in tier-II and tier-III cities. ?The move would pave the way for easy access to capital for domestic retailers, increased transfer of technology, enhanced supply chain efficiencies, increased employment opportunities and curtailment of inflation as perceived benefits. And these together would help developers reap benefits of the government move.? While some analysts are extremely upbeat about the development, some others prefer being cautiously optimistic. Gautam Mehra, executive director, Pricewater?houseCoopers (PwC), for instance, said, ?Though FDI in multibrand retail has been cleared, it will not usher in a development wave. Certain restrictions in the retail format will curtail requirements in this particular segment. There will be no huge requirement right away. It will be over the long term and not within three to four months. Overall, these actions show that the government is willing to bring in reforms, which were at discussions stage. It will cheer investor sentiment.? Pranab Datta, chairman, Knight Frank India, also bets high on FDI in multibrand retail. ?Parliament?s recent approval will attract foreign investment, which will not only benefit the retail industry, but also boost demand for commercial real estate. It also showcases the government?s seriousness on introducing reforms in India and this is just a preview of things to come. Additionally, RBI can be expected to lower interest rates in the coming months that will benefit developers as well as consumers. The change in sentiment on account of the above measures will have a positive impact on all real estate segments, be it retail, office or residential, and will certainly make 2013 a much better year in comparison with last year,? he said. Jones Lang LaSalle (JLL) India is expecting new organised retail project completions to increase significantly (by 109 per cent year-on-year) in 2013. Chennai, Hyder?abad, Kolkata and Pune will be among the major contributors to this increase, with a 53 per cent share of the country?s overall mall supply for 2013. The primary reason is that a sizable amount of supply that was expected to reach completion in 2012 has been pushed to 2013. Altogether, India?s major cities like Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata will see the addition of close to 9.5 million sq ft of mall space in 2013. Mumbai, NCR-Delhi, Bangalore and Chennai will together contribute 70 per cent of the total retail space absorption. Other cities like Pune, Hyderabad and Kolkata will account for the remaining 30 per cent. ?The government?s nod to FDI in multi brand retail will be a major driving factor for an increased activity in 2013. Since the policy opens the portals to major MNC retail brands in India, the organised retail sector will see a major transformation in terms of its overall contribution in the mid-term. This, in turn, will positively impact the absorption of retail space over the next 12 to 24 months. The absorption is forecast to touch 6.8 million sq ft and 7.1 million sq ft in 2013 and 2014, respectively,? said Anuj Puri, chairman and country head, JLL India. However, a number of analysts felt that the benefits of the much-awaited FDI decision would not become fully evident in 2013, as it would take mall developers at least two years to incorporate the design elements and dimensions required to meet global standards. There are others like Subhasis Roy, national director, retail agency ? Knight Frank India, who think that FDI in multibrand retail will have a two-fold impact on the Indian real estate sector. ?First, it will increase demand for anchor space in one-million-plus cities where the state governments agree to permit foreign retailers, and secondly, there is a possibility that rental expectation would be raised, as not much of quality space would be available, suitable for big-box retail. For multibrand retail, anchor space in upcoming, under construction and project launch stage malls, Indian and existing foreign companies are either in negotiation stage or signed up space at these new upcoming projects, which will put the new entrants in a tight spot, as they will have to look for only new upcoming projects going to be operational only after three to four years from now,? he said. There are actually more reasons than one to be optimistic about the recent development. In India, the per capita mall space among top seven metro cities is at present estimated at less than a sq ft, with the US and Europe average being 20-40 times of India. Steady GDP growth and young population having more disposable income, can attract investment for mall development in India. Compared with developed markets, the square footage in India is still very low and there is steady increase in rentals due to shortage of available quality retail space, this could trigger new projects. Besides, the impact of big foreign retail players on domestic unorganised players is also expected to be positive. In fact, it is likely that these unorganised players would move to a higher equilibrium level of efficiency in a medium to long-term horizon and that, in turn, would fuel further growth. No wonder, real estate companies, which put their expansion plans, especially in commercial space, on hold, are now going back to their drawing board. Any growth in retail sector, they say, has a direct and meaningful impact on commercial real estate, and an indirect impact on residential properties.? ritwikmukherjee@mydigitalfc.com

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