[kkstarratings]Real estate players and consultants have welcomed the government’s decision to allow 51% foreign direct investment in retail sector in the country.
Jones Lang LaSalle (JLL), in its report on retail sector, said that the new policy would boost the retail business through adoption of international standards and practices.
The entry of international products, practices and technology is expected to enhance the efficiency of domestic retailers, it said. Besides, the government has made it mandatory for foreign multi-brand retailers to place at least 50% of their total investment in back-end infrastructure, thus giving a boost to facilities like logistics and warehousing.
It is mandatory for the foreign players to make a minimum investment of $100 million to start their operations in the country.
The report says that with multi-brand retailers exploring opportunities in India, demand for retail space is likely to rise significantly. This will induce developers to launch new malls and, as store-size requirements are significantly higher for multinational retailers, it will encourage them to build larger malls along with sufficient mall infrastructure. Quality will also receive a significant boost as the malls will be constructed to meet international standards and norms.
The competitive environment is likely to enhance the productivity and efficiency of domestic retailers; with better and more transparent pricing, sales will improve significantly. Domestic retailers will also leverage their portfolios by adopting many of the new retail strategies followed by large international retailers, the report says. The JLL report predicted that the average size of shopping malls in India, which has already begun to increase as developers focus on larger spaces, will further increase.
The success of a mall does depend on its size, as superior-grade malls are nearly double the size of average-grade malls. It is estimated that the average size of a superior grade mall is 4,00,000 sq ft, whereas the normal size of average-grade and poor-grade malls are 1,90,000 sq ft and 1,50,000 sq ft, respectively, it says.
Larger malls allow for a complete tenant mix in various formats and categories, and can adopt modern mall management practices easily. With the introduction of FDI in multi-brand retail, the average size of a mall is likely to increase as foreign retailers tend to occupy large spaces.
As a consequence, total mall supply and size are expected to increase over the medium to long term.
FDI in multi-brand retail will have two-fold impact on the Indian real estate sector. First, it will increase demand for retail space in one-million-plus cities where the state governments agree to permit foreign retailers and, second, there is a possibility that rental expectation on commercial properties would be raised, as not much of quality space would be available, suitable for big-box retail.
However, Roy also points out that the new entrants will find it difficult to roll out their projects for want of quality space. Indian and existing foreign companies are either in the negotiation stage or have signed up space for their forthcoming projects, which will put the new entrants in a tight spot, as they will have to look for only new projects that will be operational only after three-four years from now.
In India, per capita mall space among top seven metro cities is presently estimated at less than a square feet, with the US’s and European average being 20-40 times that of India.
The steady GDP growth and the demographics of a young population having more disposable income can attract investments for mall development in India. Compared to developed markets, the square footage in our country is very low and with a steady increase in rentals owing to shortage of quality retail space, it could trigger new projects.
Anshuman Magazine, the CMD of CBRE South Asia, says: “This is a positive move by the government and will be a game changer for the real estate industry in India. It will encourage international retailers to look at India as a destination to set up their operations resulting in fresh opportunities in supply-chain management, warehousing and better-quality products at competitive prices. Eventually, it is expected that most of these foreign retailers will source products locally to remain competitive, which will benefit the manufacturing sector.
The expansion of the retail industry will create significant employment. However, all this is not going to happen overnight. The results on the ground will depend on the global economic situation, pace of increase in purchasing power in India, besides time taken by retailers to set up their operations, there will be a huge demad of commericial property for retail sace.
The FDI in retail in India will help the retail industry take a quantum leap towards the next phase of growth and development. More organizations in the industry will mean better structuring and fairer compensation to all stakeholders. The passing of the bill will also lift India’s image globally as a safe and secure retail destination for global brands to enter and expand.
Within the next 12-24 months, Dutt said, international retailers will accelerate their entry strategies.
As a result, developers involved in shopping-centre development will also get a tremendous boost and we will see serious players expanding in this space. Over the medium to long term, the retail sector, real estate industry and the end-consumers will benefit from the move and the economy, on the whole, will gain momentum, depth and size.
FDI in retail is going to generate better income, create jobs and catalyze large investments in upstream and downstream of the retail lifecycle. From the real estate perspective, complete townships will have to be designed to cater to the demand of the sector by creating logistics hubs, warehousing hubs and educational institutes to generate professionals. All this will push demand for housing stock around these facilities. There is no doubt that it’s a great catalyst and a great reform.
Alok Kumar Upadhayay
Real Estate Professional