Unaffordable real-estate prices force retailers to shelve expansion plans  

July 14, 2010

Big realty firms are converting their proposed projects from malls to either residential apartments or commercial office space

High rental rates and scarcity of retail space in good locations are discouraging retailers from going ahead with their expansion plans. Existing unaffordable prices and sheer misbehaviour of real-estate developers are forming a roadblock to the growth of the organised retail industry in India.

According to retail industry experts, in the past couple of years, organised retail has only grown to 4% of the total retail market and the industry is still struggling to take it to higher levels. Despite huge investments by retailers, organised retail will not grow to 15% of the total retail market over the next five years. At best, it can reach 10% of the total market. On top of that, real-estate prices are hurting the bottom-line of retailers.  

A few big realty firms like DLF Ltd and Indiabulls Group were supposed to develop new malls in Lower Parel (central Mumbai). But both of them have converted their projects from malls either into residential or commercial office space.
 
“There are many planned malls which have been converted either into residential or commercial office projects because retailers do not want to shell out such high rentals. Just 4–5 million sq ft of ready retail space is currently available for retailers. It has become difficult for retailers to get space in the right catchment,” said Govind Shrikhande, president and chief executive officer, Shoppers Stop Ltd.

You can find new retailers occupying retail space in various malls every two months; many spaces in malls also remain vacant due to high property prices in Mumbai. Retailers are looking for a minimum guarantee and revenue-share deals because during the first year when retailers are struggling to establish themselves in a certain location, they do not want to shell out heavy rentals.   

“It is true that there are few properties in good locations currently available. We are mainly finalising deals with the combination of (a) minimum guarantee and revenue-share deals. By and large, most developers have agreed to this, because there is an upside for them also in this deal. It is a win-win deal for both developers and retailers,” said Thomas Varghese, CEO, Aditya Birla Retail Ltd.
 
Currently, rental prices in various malls in Mumbai range between Rs50-Rs600 per sq ft; Rs140-Rs200 per sq ft in Gurgaon; Rs130-Rs150 per sq ft in Noida and Rs350 per sq ft and above in Saket, New Delhi. In Bengaluru, retail real-estate prices vary between Rs60-Rs120 per sq ft.

“Real-estate prices in retail spaces in prime locations are not going to come down in the next six months. Only malls which are based at the outskirts of the metros will reduce rents — or convert them into office space or residential projects,” said Abhishek Kiran Gupta, head-Real Estate Intelligence Services, Jones Lang LaSalle Meghraj.

As a consequence, there is no new retail space being developed. “Around 50 million sq ft of development is coming up in the next 24-36 months. Post that, we cannot see too much of retail space coming up. We are not able to see over-supply of property,” said Mr Shrikhande. — Pallabika Ganguly