Mumbai/Bangalore: Burdened by capital investments, lower rentals, delayed returns and overcrowding of shopping malls in an economy in which shoppers are reluctant to loosen purse strings, real estate developers have begun converting such projects into offices or homes.
The trend, which has emerged at a time when the government has been forced to suspend the opening up of multi-brand retail to overseas investment, is more evident in smaller cities, according to the industry and analysts.
Builders there have lost their appetite for malls since they have to wait for 8-10 years to get returns on their investment, and have begun scouting for bigger developers to bail them out.
Pune-based Panchshil Realty, for instance, has shrunk the mall component in one of its projects from 500,000 sq. ft to 200,000 sq. ft in Baner and is building office space instead.
In Indore, Prozone Enterprises Pvt. Ltd, a subsidiary of Provogue (India) Ltd, has converted its mall plan into a residential project because of potential oversupply in the area. The 43-acre project is going to be launched in a month or two.
Companies such as Plaza Centers NV, a subsidiary of Israeli firm Elbit Imaging Ltd that has a retail focus globally, are focusing on developing residential and office projects in India, a senior official said.
In India, it’s developing just one shopping mall in Pune and plans to develop four home projects and two office projects.
From close to 50 builders developing malls before the 2008 financial crisis, no more than six are now building retail projects, said Anuj Puri, chairman and managing director, Jones Lang LaSalle Property Consultants (India) Pvt. Ltd, at a retail forum in January in Mumbai. The permissions required for shopping malls, offices and homes are different, but it is easy to convert a retail project into a residential or commercial one, according to Jones Lang LaSalle.
“We are seeing a lot of interest from smaller property markets such as Ahmedabad, Baroda, Nagpur, Rajkot where developers are keen to switch from their mall projects to office space because the latter is underdeveloped there and stands a chance of earning better, fixed rentals,” said Harminder Sahni, managing director, Wazir Advisors Pvt. Ltd, a management consultancy.
Prozone is following a hybrid model of residential, commercial office space and retail development in cities such as Aurangabad, Coimbatore and Nagpur.
“The strategy will continue to be retail-centric assets”, but it will also focus on peripheral residential and commercial assets to generate quicker cash flows “complementing the retail component in a project, making it profitable”, said Salil Chaturvedi, deputy managing director of Provogue (India).
Most malls are too close to each other. A stretch of Nagar Road in Pune, for instance, had three malls launched close to each other in 2011. In all, there were seven malls launched in the city, all of them in a 6-7km radius. “Not only are there far too many malls in Pune, but the rentals are compressing and it doesn’t make sense to put in too much money in them,” said Atul Chordia, chairman and chief executive of Panchshil. “Inputs costs, too, have gone up by 30-40%.”
Typically, an 800,000 sq. ft mall involves a Rs 200 crore upfront payment for the land and another Rs 300 crore for development, apart from interest and other costs. More than 75% of these are holding costs for the developer. For unsuccessful malls, often “the rentals received are not even enough to pay interest costs”, said Kishore Bhatija, managing director of Inorbit Malls (India) Pvt. Ltd, run by K. Raheja Corp. Over the past two years, the gestation period—from land acquisition to the mall going operational—has increased from three years to four.
While it would previously take six-seven years for returns to be generated, it now takes as much as a decade, since input and capital costs, too, have increased by close to 10% year-on-year, according to Bhatija. The deterrents include funding as bankers shy away from retail projects.
“Banks are selective in lending to all kinds of real estate developers, and not only to those engaged in developing malls. The capital requirement is steep for these kind of loans and the real estate sector per se is not doing great, leading to cautiousness from banks,” said United Bank of India chairman and managing director Bhaskar Sen.
“Few understood that building and running malls is a science, and that factors such as catchment viability, location, supply benchmarking and mall management matter in their success,” said Ashutosh Limaye, head (research and real estate intelligence service) at Jones Lang LaSalle. India’s organized retail market is spread across 53 cities that house more than a million people each. In 2011, 13.8 million sq. ft of fresh stock became available, of which 10.7 million sq. ft was absorbed, according to Jones Lang LaSalle.
sapna.a@livemint.com
Anup Roy in Mumbai contributed to this story.