An investment splurge by private equity majors and international wealth funds has breathed fresh life into sluggish traditional retail.
The concourse at the Seawoods suburban railway station in Navi Mumbai may seem an unlikely venue for leading Indian and international brands to vend their wares. But take the escalator, and you will be instantly transported to the glitzy granite-and-glass interior of an opulent shopping mall. From Sephora and Mac to Forever 21 and H&M to Big Bazaar and Lifestyle, the storied brands are jostling for attention at the swanky Seawoods Grand Central Mall.
The Seawoods Mall opened last year after private equity major Blackstone Group acquired it from L&T Realty for Rs 1,450 crore in 2016. And in many ways, it represents the new buzz in the country's retail mall space. The year 2017 has seen 6.4 million sq. ft of new retail space completed, according to property consultancy firm JLL India, making it the highest net absorption in a year since 2011. The sector will pick up the pace further as more than 20 million sq. ft of mall space is slated to come up in the top seven cities (Delhi-NCR, Mumbai, Pune, Bengaluru, Hyderabad, Chennai and Kolkata) by the end of 2019. Of this, 11 million sq. ft should be completed in 2018 alone. Commercial real estate services firm Cushman & Wakefield estimates around 34 new malls (13.6 million sq. ft of new mall space) will be operational in the top eight cities (including Ahmedabad) by 2020 with Hyderabad alone getting 11 new establishments (see Rising Mall Area).
"There is a definite upswing in the retail mall sector," says Pankaj Renjhen, Managing Director, Retail Services, at JLL India. Arvind Singhal, Chairman of the retail consultancy firm Technopak, concurs. "We are beginning to see excitement building up once again in the sector."
Big Bets Fuelling Boom
The fresh impetus follows an investment splurge by global private equity (PE) players and wealth funds now that they have neared saturation in commercial real estate and need to diversify their portfolios. Quite a few PE funds, including US-based PE major Blackstone and Singapore's sovereign wealth fund GIC, have been on a shopping spree. Together, they have put around $724 million in retail malls across India in the first nine months of CY2017, as per JLL India data. In all, PE funds have invested $1.57 billion between CY2015 and the third quarter of CY2017 (see The New Allure).
Retail real estate in India lost its initial allure a few years ago, much like its debt-ridden American counterpart. But against the backdrop of rising consumption across metros and non-metros and a flurry of supportive regulations (more on that later), the race to expand the retail portfolios is hotting up. Blackstone, within nudging distance of market leader Phoenix Mills in terms of retail real estate assets, has already set up an Indian subsidiary called Nexus Malls to develop and operate the seven malls in its portfolio. In January 2018, it acquired an eighth with a majority stake in the Kolkata-based realtor Forum Projects' upcoming mall in Bhubaneswar. The PE firm has reportedly entered a partnership with Forum Projects to own a number of malls in eastern India. Forum expects to deliver 1 million sq. ft of retail space every year over the next three years.
GIC, too, has acquired 33.34 per cent stake in DLF's rental arm DLF Cyber City Developers for Rs 8,900 crore. The assets covered in the deal include DLF Emporio, DLF Promenade, DLF Place and DLF Mall of India in the National Capital Region (NCR). In addition, Blackstone, GIC and emerging markets investor Xander Group are said to be in the running to acquire Lodha Group's Xperia Mall in Palava, near Thane. And the last we heard, Abu Dhabi Investment Authority and Ivanho Cambridge, the real estate subsidiary of Canadian PE firm CDPQ, are scouting for retail real estate assets in India.
Buoyed by the growth in trading density and rental income, greenfield expansion is also gathering pace. While India's premier mall developers - from Phoenix Mills, DLF and Inorbit Malls to Xander Group-backed Virtuous Retail (VR) and LuLu Malls - are looking to buy and build new malls, some like Phoenix and VR have set up investment platforms with PE firms to fund the next level of growth.
Phoenix Mills created a strategic investment platform with Canada Pension Plan Investment Board (CPPIB) in April 2017 and the latter invested Rs 724 crore for a 30 per cent stake in Island Star Mall Developers (ISMD), a subsidiary of Phoenix Mills. CPPIB will put in another Rs 900 crore to increase its holding to 49 per cent within three years. ISMD has since acquired a 1 million sq. ft under-construction mall in Indore and secured a 15-acre plot in Wakad, Pune, to build a second Phoenix Marketcity there. Sprawled over 1.8 million sq. ft, the mixed-use development will house a 1 million sq. ft premium mall. Separately, in February this year, Phoenix Mills and its local partner launched Palladium in Chennai, a luxury mall spanning 2.2 lakh sq. ft.
"We intend to build another 6 million sq. ft across four-five malls over the next five years," says Shishir Shrivastava, Joint Managing Director at Phoenix Mills. The aim is to double the company's existing capacity by acquiring and developing malls in Tier-I cities, including Pune, Ahmedabad, Hyderabad and Indore. Until the greenfield expansion materialises, he intends to add another seven lakh sq. ft to its existing malls over the next three years. Phoenix spent Rs 1,350 crore in the last five years to buy out minority investors in its mall SPVs (excluding the Chennai mall) before bringing in CPPIB as a strategic partner. The company says around Rs 3,200 crore is required for its expansion plan and CPPIB will infuse over Rs 1,600 crore as equity in the joint venture. "CPPIB owns malls, and like us, its long-term objective is annuity income. Neither of us is investing with a short-term view of creating an asset and making an exit," says Shrivastava.
Other institutional investors are also stepping in. For instance, Virtuous Retail South Asia (VRSA), a 77:23 joint venture between Dutch pension fund asset manager APG Asset Management N.V. and Xander's retail arm Virtuous Retail, will soon launch a 1.8 million sq. ft mall called VR Chennai. It will be a mixed-use asset featuring a co-working centre, a boutique hotel and a rooftop club. "VR Chennai is going to redefine shopping in Chennai," says Rohit George, Managing Director of VRSA. "We would like to have a flag in the top 10 cities over the next five years."
Currently, VRSA owns 5.5 million sq. ft of mall space across Surat, Bengaluru, Chennai and Chandigarh. The joint-venture acquired VR Surat, VR Bengaluru and VR Chennai malls (from Virtuous Retail) for Rs 2,000 crore and committed an additional $150 million as growth capital. Last year, APG infused another Rs 1,150 crore after the JV acquired the 2 million sq. ft North Country Mall in Chandigarh for Rs 700 crore and rechristened it VR Punjab.
To expand its footprint, VRSA is looking at both greenfield and brownfield projects. "Our strategy is multifold. We are happy to buy land as long as it is in the right location. We will also look at half-built or fully built malls like we did in Punjab," says George, who is scouting for opportunities in Delhi, Mumbai, Kolkata and Hyderabad.
K Raheja Group's Inorbit Malls, which pioneered the mall culture in India, is increasing its footprint across west and southern India besides revamping and expanding its existing malls in Mumbai and Hyderabad. "We hope to add 2 million sq. ft in three-four malls through brownfield and greenfield expansion in the next three-four years," says Rajneesh Mahajan, Chief Executive of Inorbit Malls. It will require an investment of Rs 1,200-1,500 crore.
New Priorities Take Over Such big-ticket projects and massive floor plates may sound humungous, but the buzz in the retail mall space is all the more palpable as it comes after three years of little or no capacity addition. Back in the 2000s, too many developers had jumped in to build retail malls with little understanding of how to design, lease or operate them in sync with traffic and shopping patterns. The result was a rash of poorly designed malls with unattractive business models. Many opted for a strata-style approach, selling individual units to retailers. It pushed up the failure rate since there was no mall operator to curate the shopping experience or manage the establishments.
Understandably, several malls shut down or got converted into office space or residential complexes. According to a JLL report released in December 2017, 8.9 million sq. ft of mall space was withdrawn across cities between CY2015 and the third quarter of CY2017. Even now, only 15-20 per cent of nearly 500 malls are high-quality establishments, says Renjhen of JLL India.
Today's operators seem to have learnt from early mistakes. Instead of creating metro-only clusters, developers are following the shift in retail action to Tier-II and Tier-III cities. JLL estimates that more than half of the $1.57 billion-plus PE investments have gone to non-metro cities. And that is where players like LuLu Malls are headed.
LuLu Malls, part of Abu Dhabi-based LuLu Group, currently owns the largest mall in Kochi but is eager to tap the retail growth in Tier-II and Tier-III cities. "Our experience in Kochi has been phenomenal. Indians are brand-hungry, and we believe that Tier-II and Tier-III cities offer one of the best markets in India," says Shibu Philips, Business Head of LuLu Malls.
Philips has lined up a Rs 5,000 crore expansion plan to build five malls over the next five years. Two of these - a 2 million sq. ft mixed-use mall and hotel in Lucknow, which will house a 3.5 lakh sq. ft LuLu Hypermarket and a 55,000 sq. ft entertainment zone, and a 2.3 million sq. ft mall plus a hotel and a convention centre in Thiruvananthapuram - are currently under construction. In addition, it is planning to build a 2 million sq. ft mall and a convention centre in Vishakhapatnam. Philips is also negotiating for land in Bengaluru and Hyderabad. Before that, LuLu will launch its new small-format 2.05 lakh sq. ft Y Mall in Triprayar Junction near Thrissur by the middle of this year, its first-ever move into a smaller centre. Four more malls of that kind will come up elsewhere in Kerala subsequently.
If that raises the spectre of ghost malls in far-flung cities and largely vacant, Philips has another viewpoint. "We feel that regional centres with 30 lakh captive population are good enough to drive retail growth. When we came to Kochi, people said you don't need such a large space. But we felt they were underestimating the Indian consumer. We saw it in Kerala where our numbers are outstanding. That's the reason we want to expand," he says. For the group, the malls are "a way to expand our retail brands", he adds. The size is right, too, even for smaller cities, given that the group typically requires a floor plate of 2.4 lakh sq. ft to house its LuLu Hypermarket, LuLu Fashion and home furnishing-and-white goods retail formats.
Sriram Khattar, Managing Director of DLF, sounds cautious, though, saying it will be challenging to "maintain a balance between the cost of creating new malls and the affordability of consumers as land for retail projects is limited". So, those with land at historic values will be in a better position.
DLF, which recently launched The Chanakya in Delhi, an uber-luxe boutique mall, is in the process of identifying four-five DLF land parcels to build malls. "How much we construct will depend on our market research and if we feel a retail mall can give us return on investment," says Khattar. The expansions will be in partnership with GIC as it "adds a lot of strength to the joint venture and brings international experience to commercial and retail projects," he adds.
In spite of the usual business risks, the landscape has changed, says Mahajan of Inorbit Malls. "For the first time in a decade, we are seeing new malls being announced. While malls did open between 2006 and 2016, most of them were announced between 2004 and 2007. But now, we see people going out to buy land and build malls."
There is one exception. Singapore-headquartered CapitaLand, one of Asia's largest real estate companies, recently exited its retail mall investments in India and sold its assets back to Bengaluru-based Prestige group.
Growth Drivers In CY2017, some 4.7 million sq. ft of mall space was withdrawn, according to JLL, but retail consumption has continued to grow, thanks to increasing urbanisation, the country's young demographic and rising disposable incomes. Of late, it has been fuelled by the entry of global brands who need quality space and also the expanding footprint of domestic retailers. "Ten years ago, there was no H&M or Zara. Today, if they could get 20 locations that meet their standards, they will take them all," says Singhal of Technopak.
Add to this less stringent foreign investment rules for single-brand retailers, longer shopping hours, a new framework for real estate investment trusts (mulled by most PEs) and slowdown of e-commerce players due to discount and tax-related regulations, and the sector becomes truly attractive. After all, it gives the highest return on investment among all real estate categories. According to George of VRSA, while commercial real estate offers a fixed escalation of 5-15 per cent every three years, a good shopping centre can give between 10 and 20 per cent growth in income (rentals plus a share of retail sales) every year.
"Retail rentals can go up every month as sales go up. But quite a few mall developers have failed to comprehend it even though some people are playing it well," says Susil Dungarwal, founder and chief mall mechanic at Beyond Squarefeet, a leading mall operator and advisory company. As per his estimates, vacancies in non-premium, leased malls are down to 10-12 per cent today from 25-30 per cent two years ago.
Vacancies in premium malls continue to be negligible. Phoenix Malls' Shrivastava says consumption (or retail spends) increased at a compounded annual growth rate (CAGR) of 22 per cent between FY2012/13 and FY2016/17 to touch Rs 5,800 crore in 2016/17 while rental income clocked 19 per cent CAGR in this period. "We are going to see huge teen growth in consumption for the next three-four years, and it will have an impact on our rental incomes. Overall, the gap between demand (from retailers and consumers) and supply (of mall space) continues to widen."
VRSA's George agrees. "Fundamentally, everyone is playing on the entire India consumption story. Most of the foreign capital that has come in is buying existing centres or cash flows. So, we are still going to have a huge gap, going forward."
George says not many players committed permanent capital and took development risks in the past, nor they did look at the business as a master retailer would. Moreover, new developments have a gestation period of five-six years, which is why he feels it is difficult to come up with a retail development strategy within a PE fund structure, where capital is limited by nature. Also, barely a third of the existing malls in the country are quality malls, and with the PE funds' recent buying spree, fewer still will be up for grabs. "At the end of the day, to play retail, you have to be a focussed retail operator like anywhere else in the developed world," he adds.
Surprisingly, mall operators do not see e-commerce as a big challenge. "It is not so much a question of online and offline. The bigger challenge is the availability of right infrastructure and connectivity. If that is there, the malls will grow," says Inorbit's Mahajan.
For mall operators long fixated on traditional business models, the bigger challenge could also be curating an ultimate shopping experience. That is why entertainment and food have become the big anchors today with malls evolving into what Shrivastava calls "destination centres for leisure experiences".
"Organised retail will continue to do better and better in a country that is hugely under-penetrated, but organised retail must move to experiential shopping," points out DLF's Khattar. According to him, demonetisation and e-commerce have certainly acted as "deflators to retail resurgence. But the sentiment is improving although relatively slowly."
"If you give people the right opportunity to consume, they will spend," says JLL's Renjhen. Both mall operators and PE investors are banking on that.
The writer is a freelancer based in Mumbai