Malls face uncertain future as customers desert them

Industry experts say 60% of malls in top Indian cities are non-performing and the competition from new centres will increase the failure rate going forward

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Malls face uncertain future as customers desert them

Nearly 60% or 160 out of the overall 255 malls currently operational in top seven Indian cities are facing an uncertain future as customers have deserted them for various reasons.

According to Jones Lang LaSale (JLL), an international property consultant (IPC), the Indian national capital – Delhi and National Capital Region – has between 75 and 83 malls that are performing either average or below average while that number for malls in Mumbai and Bangalore stands at 25 and 31 and 27 respectively. These three markets house majority of the average or below average performing malls.

Other markets such as Kolkata (where 9 malls are classified as average or below average), Chennai (5) Pune (3) and Hyderabad (2) have also seen the number of under-performing malls go up.

Disappointing performance of Delhi malls was primarily because of oversupply, according to Rajiv Talwar, group executive director, DLF that owns/operates several malls, including DLF Promenade and DLF Ambience. "Most malls in Delhi were selling space instead of leasing, which adversely impacted footfall," said Talwar.

"There was also the problem of right positioning by developers that led to rampant incidents of repositioning and their adaption to new use," said Sunil Agarwal, associate dean and director, real estate accreditation RICS. He added that some malls have converted to office space while others have doctors' clinics on top floors.

Success rate of malls, said Pankaj Renjhen, managing director – retail services -- JLL India, largely depends on factors like design and layout, the mall's brand positioning, location and how well they cater to the needs of their target segments. "Also, whether or not they have been able to evolve into family destinations rather than just remaining shopping centres plays a big role," said Renjhen.

In Kolkata for instance, Ambuja Neotia group's City Centre Salt Lake remains the mall with the highest footfall with South City coming a close second. According to Sanjeev Daruka, director, Re-quest Buildwell (a real estate consultant), City Centre remains a crowd puller because of its open air campus like ambiance and also because of its location at the satellite town of Salt Lake, home to the IT sector and some of the richest citizens of greater Kolkata.

"In comparison, its twin, City Centre 2, though having comfortable occupancy, still struggles for footfalls, partly because of its location at the upcoming Rajarhat town," said Daruka.

According to JLL, malls are typically graded according to their average vacancy levels and rentals and that rentals are in indirect proportion to the vacancy levels. "While rentals are high in malls with vacancy levels of 10% or less and low in those with 20-30% vacancy levels, they are poor in malls with average vacancy levels of 30% or more," said Renjhen.

Over the last decade, the Indian mall/shopping centre industry has undergone significant changes. While there are a handful of companies like Inorbit Malls, Phoenix Marketcity and Prestige that are serious players in this business, a majority joined the bandwagon for the real estate play given that retailing or modern trade had started gaining huge traction then. In fact, a significant percentage of these unsuccessful malls are owned by real estate players with no understanding of running run this business.

In fact, Pranay Sinha, co-founder, Star Shopping Centres Pvt Ltd (a specialised mall management company), is of the view that over 80% of the malls in India are below average performing assets. "It's (mall) not being treated as a specialised asset class that it is. Most of the centres are under-performing on account of poor retail planning, weak mix of tenants and bad management. Most centres are currently facing all of these issues and hence are in bad shape," said Sinha who was earlier president and chief executive officer of Select Citywalk in New Delhi.

While problems with Indian malls/shopping centre business were identified much in advance, the asset owners – riding the realty sector boom – haven't really take the learnings seriously while continuing to do the same mistakes. Take for instance malls like Nirmal Lifestyle in Mulund, which was once a very popular shopping destination began loosing attractiveness because of poor management. The mall has been shut down completely as asset owners now want to build residential apartments instead given the lucrative business opportunity the new land use offers.

According to Rajneesh Mahajan, executive director of Inorbit Malls, that operates six properties across India, products that are not well-planned and have not been able to deliver in the current competitive business environment are the ones facing survival issues. "This apart, there are also malls that have faded out despite starting well initially. Thus, products have to evolve and change over the years to remain relevant to the target customers. This is a very challenging business and asset owners need to keep a close watch on the tenant's performance and take required measures to ensure tenants and customers find what they are looking for in the shopping destination," said Mahajan.

Another reason for such a high number of non-performing malls, Susil S Dungarwal, retail and shopping mall specialist, Beyond Squarefeet Mall Management Pvt Ltd, said, is that 90% of them are on sold-out model. "If you see the list of successful malls, all of them follow the lease approach. This is a key differentiator that mall developers need to understand and religiously follow if they want to be successful in this business," he said. Beyond Squarefeet currently manages more than 30 malls across India, Iran, Nigeria, Nepal and Qatar.

Industry experts are of the view that a majority of the below average performing malls will become non-performing if the asset owners do not take corrective action. "I think at least 40% of the below average performing malls will become non-performing in the next 12-24 months. And with cut-throat competition form new malls the failure rate will only increase going forward," said Dungarwal.

(With inputs from Praveena Sharma in New Delhi and Sumit Moitra in Kolkata)

In Mumbai, only 10-15 malls are doing well while 25 to 31 malls are performing either average or below average, according to Jones Lang LaSale, an international property consultant. In Pune, 5 malls are doing well while 3 are performing either average or below average

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