Good days yet to come for malls as vacancies rise

The retail real estate segment saw a significant rise in vacancies in April-June quarter of 2014 over the January-March levels as supply increased and tenants exited under performing centres.

According to a report by property research firm DTZ, the Delhi-NCR market witnessed highest increase in shopping mall vacancy at 3.5% followed by Pune at 2.6% and Mumbai at 2.3%, respectively.

"In the case of Delhi-NCR, the vacancy level stood at 19.5%, up from 16% during the previous quarter due to the addition of new space. Occupiers continue to prefer malls offering quality space, good mall design and a strong tenant mix. In contrast, lower grade malls continue to witness higher vacancy levels," Rohit Kumar, head of India Research, DTZ, said in the report.

While the Delhi-NCR market, witnessed new supply of 2.3 million sq ft during Q2, about 7% completed in Q4 2013 entered the market in second quarter due to regulatory issues. Additional 2 million sq ft of mall space is expected to be completed in second half 2014, but given the extent of project delays, some of this is likely shift to 2015.

Vacancy levels in Pune increased sharply quarter on quarter from 27.5% in Q1 2014 to 30.1% in Q2, and with over 2 million sq ft of retail space under construction, vacancy levels are expected to remain high over the next few years.

Contributing significantly to vacancy levels in Mumbai were malls located in micro-markets of Andheri, Bhandup-Mulund and Navi Mumbai. "However, with no new supply expected over the next year, the vacancy level is expected to decline in the coming months," said Kumar.

Though new supply certainly has led to the increase in vacancy levels across malls in these cities, retail industry experts said, additional factors like tight market conditions, experimenting with new malls and aggressive evaluation of sites by retailers also were equally responsible.

As per Devangshu Dutta, chief executive, Third Eyesight, retailers these days are very practical about their stores and have no hesitation in shutting down the non-performing outlets. "A lot of focus is on performance potential of newly opened or for that matter existing stores. Besides, given the current market conditions, it is pragmatic to discontinue sites that do not justify the cost of operations," said he said.

International property consultant Cushman & Wakefield, however, differs on vacancy levels.

While total vacancy in Q1 2014 was recorded at 14.5% there has been very little supply in Q2 2014 and limited churn in occupants, it said. As a result, there not been any significant movement in vacancy.

Sanjay Dutt, executive managing director, C&W in South Asia, said, "This scenario has also resulted in stable rentals across mall locations in key cities of India. At best, the Indian retail market can be described as stable; however, going forward, retailers may been looking at a more robust plan of expansion in line with increase in disposable income of the end-user / purchasers as granted in the union budget."

Meantime, mall operators feel vacancy rates differ from operators to markets. Also, the business model adopted by the mall owner/operator plays a big role in defining the success of the shopping destination.

Kishore Bhatija, MD & CEO, Inorbit Malls, said, "While vacancy levels could be seen as indicators of the overall business scenario to some extent, it's certainly not something that one should be reading too much into. Besides, the market dynamics are such that well-managed malls with a good tenant mix will always have an edge over others."