For ragged realtors, retail FDI is a Godsend

Real estate developers, which are battling huge vacancies and lacklustre rentals, are set for a windfall following a sudden proposal to open up the retail sector for foreign competition.

As overseas chains line up to grab the biggest retail pie, experts see most developers dusting up shelved projects and trying out newer revenue and business models as they unexpectedly get to choose from a wider basket of brands.

While this scenario would be played out in the long term, the stuck inventory is set to be lapped up in the short term.

Close to 18.3 million square feet (msf) of retail space is expected to come in 2011, highest since 2005, and push up vacancies to 24% during the current fiscal from 18% in 2010, according to data by Jones Lang LaSalle India, a real estate research firm.

Though absorption, too, would be higher at 12.1 million square feet, there would still be surplus space. Of this 12.1 msf, about 4.7 msf has already been absorbed in the first half.

Pankaj Renjhen, managing director - retail services, Jones Lang LaSalle India, said oversupply in many large cities present a huge opportunity for the foreign brands to take up space almost immediately.

DLF, the country’s largest developer, was the first to latch on the opportunity by announcing Rs3,000 crore investments in malls. “In the next three to five years, the sector will grow and consumers will benefit.

The supply chain issue will also be addressed by the industry adequately. We will invest Rs2,000 crore to Rs3,000 crore in the next five years,” DLF vice-chairman Rajiv Singh said. Experts see more such announcements soon.

Pranay Vakil, chairman, Knight Frank India, said, “Developers have been sitting on the fence waiting for this clearance. I surely see big developers coming up with retail projects,” he said.

Out of 346 mall projects that are at various stages, about 15 were dropped in the past few years, most of them in Bangalore, according to Jones Lang LaSalle data.

Most global research firms agree the country has long been on the radar for investment by foreign brands. Industry sources said Indian developers are likely to form joint ventures with foreign brands, which could entail a complete mall-management package from the developer’s side.

FDI in retail is also seeing up opening a new segment in the retail space.

Developers are expected to develop standalone structures and lease them out to long-format players like Wal-Mart that prefer to occupy an individual structure rather than setting up shop in malls.

Also, developers would be spoilt for choice while picking up the brands.

“Real estate developer will have more brands to choose from while leasing out the space,” said Shubranshu Pani, managing director-retail, Jones Lang LaSalle India.

This would improve occupancy rate at malls currently struggling to fill the empty spaces.

Vakil said it solved the issue of brand repetition with malls.

“More brands would mean more demand, which would be a win-win situation,” he said.

However, concerns still remain.

Some analysts fear developers may miss the bus as they are not prepared to meet the sudden surge in demand.
Sameer Baisiwala, Arunabh Chaudhari and Harshal Pandya, analysts with Morgan Stanley, Monday said the preparedness in terms of ready or to be ready in 6-18 months retail space/malls appear minimal.

The Morgan Stanley research note said among the listed players DLF’s completed stock in mall space is only two msf, a good amount of which is already occupied. At the earliest it can add 1.5 msf, but that would still take another two years.

Phoenix Mills, due to its focused exposure in the retail segment, is expected to emerge as an exception with analysts seeing it cutting 30-40% vacancies in a couple of its malls.

However, FDI is retail is set to disappoint on lease rentals as they are unlikely to rise in the next three years.

Funding, too, remains a challenge as the real estate companies are already reeling under huge debts and interest costs.

Also, there are developers who would like to stay away from retail despite the likely advantage.

Mahesh Gupta, group managing director, Ashok Piramal Group, said, “It is a good step, but the group will not look at re-entering the segment. We do not intend to start from scratch in a segment that we have already exited.” The group was among the first entrants with its erstwhile Crossroads mall in Mumbai.

For some like Essar group’s Equinox Realty, the new policy doesn’t excite much.

“The policy is long overdue. The fine-print of $100 million looks more like a carrot-and-stick model. It will excite a lot of developers to revisit their retail projects, but does not speed up our plans for the retail segment,” said Cherag Ramakrishnan, CEO, Equinox Realty.