Too often in the property world, what could best be described as a “trend” is exaggerated into a “phenomenon”. But in the case of India’s retail market, the developments proposed for the sub-continent in the next four years can quite safely be described as phenomenal. At last count more than 600 were either planned or under construction.
Putting the number into perspective, four years ago there were only three malls in a country of 1.3bn people. Today there are about 35 malls covering roughly 5m sq ft. According to Knight Frank there will be an estimated 75m sq ft of mall space available across the country within a couple of years.
“More has happened in the Indian real estate market in the past eight years, than past 40,” says Vinod Rohira, director of sales and marketing for the K Raheja Corporation, which has built the 450,000 sq ft InOrbit Mall at its 8m sq ft Mindspace mixed-use development on the outskirts of Mumbai.
Investment is prompting most of the development, spurred by the success of the first couple of malls, which were constructed in 2000. As organised retail accounts for only 3.5% of the total market it is not hard to explain the investor interest.
But, with growth of this size comes problems. There are doubts as to whether all the malls will actually get built. And there are further worries that those which do make it from proposal to reality will find themselves badly managed and without tenants. With so many malls proposed – more than 50 are planned for Mumbai alone – it is unlikely that they will all get built. One Indian retail adviser believes that “about 30% to 40% of the proposals will get built, but the rest will falter”.
The worry is that some of those that do make it off the ground may not be successful, leaving India with empty or decrepit retail mausoleums. “It was the success of the first couple of malls which led to the second round of expansion, which was not very professionally managed,” says Jones Lang LaSalle’s head of retail in Mumbai, Vivek Kaul. He believes that lessons from the earlier mall developments must be learned quickly, or these new projects could fail.
“Malls were sold piecemeal to multiple investors, with no clear directive towards mall management and leasing process, leading to low occupancy, unplanned adjacencies, bad tenant and trade mixes,” claims Kaul. The malls started to be treated as real estate development rather than a retail development which led to strata title sales.
Kaul highlights the northern city of Gurgaon, in the Haryana state, as a prime example of what he is worried about. The city has a number of shopping centres either under construction or operational with very low occupancy levels. “The developers in this case have not suffered losses since they managed to sell these spaces to investors at a very early stage,” says Kaul. But he adds that the investors have lost money and got very poor returns.
Of course, letting in the foreign retailers who are banging at India’s door could solve a lot of these problems. However, the Indian government is still keeping a tight rein on direct foreign investments — although that is starting to ease (see panel).
So it has been up to India’s own home-grown retailers to change the system.
Because of the losses they were suffering, retailers have pushed developers not to sell their retail space. Leasing the units, with developers retaining the properties, is now slowly becoming the norm. Along with the retailers’ reaction, financial institutions have become more willing to fund shopping centre development – something they were not prepared to do before.
“Construction finance, equity participation and rent discounting, all these models are available for developers today for their funding. This makes it easier for developers to leave the old strata sale model and make the future of the shopping centre industry brighter,” says Kaul.
With so much interest in the Indian market, coupled with the rapid growth in mall development, it is not surprising that there was something of a learning curve. K Raheja Corporation is among the new generation that leases out its mall space. Vinod Rohira says: “There’s a lot we can learn, especially from international retailers. It’s about the experience of shopping, and in India the consumer is different.” But with the number of malls opening up, the experience will be even better, with malls that are professionally run.
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● 95% of the country’s retail sales are made through 12m small shops ● The retail market is worth an estimated $250bn, and is the eighth largest in the world ● India’s market for consumer goods could reach $400bn by 2010 ● Today there are about 25 malls covering 5m sq ft ● Organised retail only accounts for 3.5% of the total market ● The annual growth of department stores has been estimated at 24%, which is faster than the retail sector overall |
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“Many smart people, people smarter than I, believe India could be the next China. So certainly as a retailer it’s a place where we’d like to be,” said John Menzer, vice-chairman of Wal-Mart’s US stores and former head of international operations, speaking to the Wall Street Journal in January. And it’s not only Wal-Mart which has been lobbying heavily to get its stores into the country. Tesco and Ikea are just two of the global names also said to be interested. At present a company can trade only via an affiliation or as a franchisee of Indian firms. Marks & Spencer and Debenhams are two UK names that have gone down this route. But there is a major push both inside and outside the country to allow foreign direct investment. In a spoof top-10 wish list of New Year resolutions that Indian prime minister Manmohan Singh should stick to, published in India’s Business Today newspaper, allowing FDI in retail was number three on the list of importance. Quoting figures from a recent PricewaterhouseCoopers study, the article pointed out that FDI would generate 8m jobs in the sector over the next five years. Slating the argument that FDI would kill “mom-n-pop stores”, the article stated that “better supply chain management may actually end up helping millions of India’s poor farmers get better prices for their products.” Developers would also like to see the retailers allowed in. “Tesco and Wal-Mart showing interest in India is good because it will bring better practice to the retail market,” believes Vinod Rohira, director of sales and marketing for the K Raheja Corporation. There are signs that the government is starting to rethink its position. Last October Prime Minister Singh expressed confidence that he would be able to get India’s left-wing parties on board on the matter. Meanwhile, Jones Lang LaSalle’s head of retail in Mumbai, Vivek Kaul, says there will be relaxations in the luxury goods market. “There are indications that luxury retail might be allowed in in the next year.” |
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It began with the Americans. General Electric pioneered the offshoring concept in the late 1980s when it set up a financial services office in Hyderabad, central India. It now employs more than 15,000 people there. Others, such as American Express, quickly followed. Then around five years ago UK companies started to use the talents in the Indian market. For western companies, outsourcing has meant savings of millions of dollars. In India, it has meant the creation of hundreds of thousands of jobs and brought about a new generation – with western-style careers and an appetite to spend. According to management consultant firm McKinsey Group, offshoring has “played a major role in transforming India from a slow-growth economy with recurring balance of payments problems to a fast-growth economy generating ample foreign exchange surpluses.” The result is that annual retail spend is now estimated at around £141bn. But McKinsey estimates that India’s market for consumer goods could reach £225bn by 2010 – making it one of the five largest in the world. Meanwhile, last October, KPMG reported that the organised retail sector in India was expected to grow at a higher rate than GDP growth in the next five years. It stated this was driven by changing lifestyles, strong income growth and favourable demographic patterns. Although there has been a backlash in the UK in the past couple of years with some companies closing their India operations, particularly call centres, outsourcing to the subcontinent shows little sign of abating. A report published by McKinsey in January states that India is in a position to sustain its global leadership position, expand its offshore IT and business process outsourcing (BPO) industries at an annual rate greater than 25%, and generate export revenues of about £33bn pa by 2010. And with that growth the cash registers will continue to ring even more loudly. |
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