ABOUT 15 years ago, urban Indians discovered there was a better and more organised way of shopping. Instead of wading through congested street bazaars on soggy Saturday evenings — dodging beggars and keeping an eye for pickpockets and anti-socials — they discovered the pleasures of shopping in air-conditioned comfort at malls.

While urban Indian shoppers have been pampered by retailers all these years, the shopping mall business itself hasn’t been making much money for most players including real estate developers, mall managers, anchor clients, or other retailers. The mall culture is gaining popularity, but unfortunately for many retailers, the footfalls (the number of ‘shoppers’) are not getting converted into business.

Hundreds of thousands of residents in Delhi, Mumbai, Bengaluru, Chennai, Pune and other cities throng malls on weekends spending hours in the air-conditioned structures. While many spend at food courts or watch a movie at a multiplex, they are reluctant to shop at the malls, especially at high-priced branded outlets.

And the growing popularity of online shopping — with the likes of Amazon, Flipkart, Jabong, Myntra, BigBasket, etc luring millions of shoppers to their sites — is threatening the future of the mall business.

Last week, at the annual real estate conclave of the Confederation of Indian Industry (CII), global real estate and property services consultancy JLL — which was the knowledge partner at the meet — released its report, Indian Real Estate: headed for a tectonic shift.’ And the report presented a rather bleak picture for the retail sector.

The overall vacancy rate stands at more than 20pc in retail malls across major Indian cities, found the report. Malls have also been witnessing a lot of churn in recent years. On an average, when business is good, churn rates of around 15-18pc have been recorded. In the initial years, the range was 4-8pc in well-managed malls in India.

“Poorly performing retailers exit malls midway through their lease contracts or landlords initiate churn to improve their portfolio of tenants at some locations while at nonviable locations, retailers are driving the churn,” points out the JLL India report. “Contract periods have shortened to 2-5 years today from 9-20 years seen in the mid-2000s.”

While overall vacancy rates are more than 20pc, at successful malls it is around 10pc and a few select ones are operating at near full capacities. “In recent years, we have seen bad malls beginning to succumb to the business viability stress and giving up hope,” notes the JLL report. “Consequently, these malls are either converting into grade-B office spaces or getting demolished to make way for a new asset class in real estate.”

Some more malls are expected to withdraw from the retail realty business as a result of which the business of average and good performing malls will improve. “This is a much-needed course correction, which will continue to happen for some time.” JLL research estimates around 14 malls to withdraw from retail operations, having a combined mall space of 3.5–4.5m sq ft.

ANOTHER international real estate consultancy, CBRE, noted in its India retail market view for H1 of 2015 that new retail space addition remained negligible during the first six months of the year. Most prominent shopping centre projects that were expected to reach completion during the period were deferred to the second half of the year, largely due to construction delays.

The key demand drivers for store space were global and domestic food and beverage (F&B) retailers, followed by value retailing. “As a consequence of the deferred supply of fresh mall space during the first two quarters of 2015, there has been a rising demand for retail space across high streets of leading cities such as Mumbai, NCR and Bangalore,” points out the CBRE report. “The lack of quality space has also given more bargaining flexibility to popular shopping centres, leading to the emergence of the performance guarantee model—wherein brands are required to guarantee a certain amount of business to the mall developer.”

According to Anshuman Maga­zine, chairman and managing director of CBRE, South Asia, since the addition of fresh shopping centre space is expected to remain sporadic and unlikely to accommodate the real estate plans of most brands, high streets will attract the spill over demand from retailers over the coming months.

“Online shopping trends, meanwhile, are fast catching up with traditional shopping methods on the back of an increasing number of e-commerce platforms,” he adds.

The second half of 2015 is likely to witness fresh supply addition to the tune of 6m sq ft in cities such as Delhi (which along with satellite cities such as Gurgaon, Noida and Greater Noida constitutes the National Capital Region), Bengaluru, Pune, Hyderabad, Mumbai and Kolkata.

Gurgaon in NCR is considered to be the mall capital of India and developers continue to pour money in new developments. More than 60pc of the fresh mall space anticipated in the rest of 2015 is expected to come up in NCR.

Increasingly, non-metros including Amritsar, Ludhiana, Chandigarh, Jaipur, Lucknow, Indore, Bhopal, Ahmedabad, Surat and Nagpur are witnessing considerable growth in retail development as the mall culture gains popularity.

There are huge variations in average rentals at shopping malls across India. While the rentals range between Rs300 and Rs1,200 (per sq ft per month) in Delhi and Mumbai, it averages between Rs150-300 in Bengaluru and Hyderabad.

Estimates are that about 500 malls were developed across India over the past 15 years, but a majority has had to shut down because of lack of business. Many developers rushed in during the boom years, though they lacked the expertise to build malls. They also sold space, instead of leasing, with the result that the malls were badly maintained. They also did not provide for adequate parking, driving away potential shoppers.

Consumers are choosy and avoid visiting malls where hygiene is not maintained. Most of the successful malls are managed by specialist firms or by the developer, who outsources housekeeping and other tasks to professionals.

Published in Dawn, Economic & Business, August 3rd, 2015

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