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Mall growth slows as builders avoid retail sector

LiveMint logoLiveMint 21-09-2017 Bidya Sapam

Developers discouraged by prolonged gestation periods, slow rental growth and lack of prime land parcels have avoided opening new malls, squeezing supply of prime retail space. Despite low penetration of modern retail, shopping mall development has significantly slowed down in the last four years with only a handful of developers continuing to build premium retail spaces, retail consultants and developers said. 

According to data compiled by property consultant JLL India, of the total 74 builders which were active in retail real estate in 2005, only five still continue to build such spaces. The rest have either exited or stopped expanding. Besides, the share of retail development in overall commercial space has fallen to 22% from 41% in 2009, JLL data showed.

During 2005-08, before the global financial crisis hit, 74 developers launched retail projects across the country, encouraged by the robust economic activity during the period. The number gradually slipped to 63 in the 2008-11 period, and during 2012-16, only 45 developers completed their retail projects. However, in all these three phases, only five developers have consistently performed and delivered premium shopping malls, said Ashutosh Limaye, head of research, JLL India. 

“Across these three phases - good, bad and rebuilding period—only a few business houses had the capability and intention to be in this business. Not all developers have the expertise to manage a large mall,” he said. 

As several malls closed and few opened in the last year, retail space fell by 300,000 sq. ft for the first time in the country, according to a JLL report released earlier this year. While five malls shut down last year, 10 others transformed to offices, educational institutes, shopping clusters, hospitals and banquet halls, the report said. Besides, rental growth has almost remained flat at 3% in the last three years, Limaye said, adding vacancy across prime shopping malls across major cities now stands at 9%.

Some of the top developers which have continued in the retail business since before the global financial crisis are DLF Ltd, K. Raheja Corp and Phoenix Mills Ltd.

“Post global financial crisis, we went into a consolidation mode. We shifted our business model to leasing rather than doing strata sale. We understood that holding and controlling the asset for superior customer experience and tenant is the way forward,” said Pushpa Bector, executive vice-president and head, premium malls, DLF Utilities Ltd. The company currently operates five shopping malls with occupancy levels of 95-97%.

Others like Select CityWalk in New Delhi, though one of India’s best performing malls with an occupancy level of 99%, have not expanded in the last one decade. However, according to Arjun Sharma, director, Select CityWalk, the company continues to look for opportunities to buy land parcels to build more malls particularly in the National Capital Region (NCR) and western part of the country.

Sharma said high land and property prices have slowed retail development and made many retail projects unviable. “We have been around for the last 10 years but the whole 10 years have been extremely choppy in terms of the world economy and in terms of the financial crisis. And unfortunately, the asset prices of land and real estate in the country are still artificially high,” he said. According to Rajneesh Mahajan, chief executive officer, Inorbit Malls Ltd, part of K. Raheja Corp, lack of large land parcels and right infrastructure have been some of the biggest challenges in expanding its retail business. The company, which recently turned one of its malls in Pune into a business centre, currently runs four malls with a total retail space of over 3 million sq. ft.

“Announcements of new projects have been very slow. Most of the projects which were launched in the last seven to eight years are largely the projects which were announced in 2004-05. It’s largely to do with non-availability of land parcels and good infrastructure connectivity,” he said. InOrbit launched its last mall in 2013. 

Mahajan said the long gestation period of around 8-10 years to build and turn around a mall also makes the business unviable for most developers.

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