The Rush For Space Begins

Businessworld, April 30, 2011

Vishal Krishna

Remember those malls and shopping centres with those “space available” signs? Well, the signs have disappeared. In the first quarter of this year, Reliance Retail leased 78,000 sq. ft for a hypermarket in Kurla in Mumbai; Pantaloons India has just leased 20,000 sq. ft in Bangalore. It is not just the available space that’s disappearing: rentals are going up, too.

“Yes, last year there were places available and rentals were low, but the base effect seems to have caught up,” says Devangshu Dutta, CEO of Third Eyesight in Delhi. After a slow 2009, better salaries and wages have brought shoppers back to the malls; and developers are moving quickly to add retail space.

But not quickly enough, it seems. In cities such as Mumbai, Bangalore and Delhi, rentals are rising due to shortage of available space and the demand for location. That could stretch the economics of retail a little bit, but store owners seem confident that the customers will continue the shopping spree. Rents for anchor stores — which take up a significant chunk in a single mall (Pantaloon, for instance) — would be stable, since they bring large footfalls. The smaller stores may find it a tad difficult, but expect booming sales to take care of that.

According to real estate consultancy Jones Lang LaSalle, rental values in south Mumbai grew marginally during the quarter in line with rising interest in prime retail properties; retail rentals averaged Rs 225 a sq. ft per month, and in north Mumbai, they were Rs 135 a sq. ft.

Compare that to the rentals in the suburbs where rentals are Rs 85 a sq. ft. The prime south and prime north micro-markets recorded average rents of Rs 225 and Rs 135 per sq. ft per month, respectively. Mumbai is expected to witness 4.8 million sq. ft of new mall space being added by end-2011 and 6.9 million sq. ft by 2013: think expansions at Infinity Mall at Malad, Viva City Mall at Thane, R-City Mall Phase II at Ghatkopar, and Magnet Mall at Bhandup.

In Delhi, retailers have restricted their expansion, and rents haven’t stopped climbing. Even after six malls were completed in Delhi’s suburbs, rent per sq. ft went up by about 7 per cent. In prime locations, rent rose 25 per cent.

“With limited future supply in the prime micro-markets, rents are expected to rise in the near term,” says Abhishek Kiran Gupta, head — research & REIS, Jones Lang LaSalle India. “Suburban markets will also see rental values appreciate over the coming quarters, though perhaps limited to certain quality assets.”

How well should stores do? For 1,000 sq. ft, rent, wages and utilities can’t exceed 20 per cent of total charges to break even. Average sales for a store of this size should be Rs 1,500-2,000 per sq. ft. “Malls sign in anchors at good rates and then the anchors are the pitch for the mall owners to bring in other retailers at higher rentals,” says Sanjay Badhe, an independent retail consultant and former CEO of Trexa, the mall management company of Tata Group’s retail arm Trent.

Retailers are looking beyond the metros to Tier-II towns such as Coimbatore, Indore, Siliguri and Raipur. “Consumption is rising in smaller cities,” says Govind Shrikhande, managing director of Shoppers Stop in Mumbai. And guess what? Rents in those cities are not so high.

(This story was published in Businessworld Issue Dated 09-05-2011)