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Spiralling rentals hit retail boom

Spiralling rentals hit retail boom
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First Published: Mon, Dec 24 2007. 12 57 AM IST

Big shopper: A Reliance retail outlet. The company plans to spend $6 billion on convenience stores, supermarkets and hypermarkets.
Big shopper: A Reliance retail outlet. The company plans to spend $6 billion on convenience stores, supermarkets and hypermarkets.
Updated: Mon, Dec 24 2007. 12 57 AM IST
Bangalore: First came political misgivings and then street protests by small-store owners across the country, who were afraid they would be put out of business by the deep pockets and discounting powers of the retail chains.
But that perhaps didn’t worry Indian tycoons as much as the surge in rentals and space shortages they are now battling in a bid to open thousands of stores and change the way the subcontinent shops.
In the glitzy, glass-and-steel malls that dot Indian cities or are being built, square foot prices have almost tripled in the last three years, according to retail consultant Arvind Singhal. “Rentals have shot up to a point where very few retailers will make a profit,” said Singhal, head of the consultancy KSA Technopak.
Big shopper: A Reliance retail outlet. The company plans to spend $6 billion on convenience stores, supermarkets and hypermarkets.
He added that retail chains may have to slow expansion. “Retailers don’t want to get into a mall if there’s no financial viability, so a lot of current retailers and likely new entrants are putting their growth plans in review mode,” Singhal said.
Mall rentals shot up as an economy expanding 9% a year drove up land valuations, and rising prices of steel and cement forced developers to pass on the increased cost of construction to tenants.
Retailers may get no relief until more space comes into a market in which 250 malls are under construction, on top of 300 that have opened this decade in what pundits call the “great retail gold rush”.
“The share of real estate in the cost of our operation is increasing, and that is certainly a very unhealthy trend,” said Bijou Kurien, a senior executive at Reliance Retail, an arm of India’s biggest conglomerate, Reliance Industries Ltd.
“Sometimes you find that the cost of space being sought is so high that it doesn’t make business sense for us to go into a particular mall,” Kurien said on a recent visit to Bangalore.
The cost and space problems have been largely obscured by political reservations and street demonstrations against retail chains in a market dominated by 15 million mom-and-pop stores.
Reliance, the most aggressive retail player with plans to spend $6 billion (Rs23,760 crore) on a giant chain of convenience stores, supermarkets and hypermarkets, has suffered the most. In Uttar Pradesh, the government ordered Reliance to close its stores after attacks by traders.
The Marxist governments in West Bengal and Kerala are opposed to organized retail, which accounts for less than 5% of the consumer market in a nation of 1.1 billion people.
Annual consumer spending is estimated by the consultancy McKinsey & Co. at $370 billion and forecast to quadruple to $1.5 trillion by 2025, as a youthful population earns more and millions climb out of poverty. That has attracted business groups such as Reliance, Tata and Aditya Birla into retail, only to find there is a heavy price to pay.
“If rentals were expected to be in the range of Rs60-75 per sq. ft per month three years ago, the same malls are now expecting Rs150-200,” said KSA Technopak’s Singhal.
“Some mall developers are quoting Rs400-600—a rate at which no retail business can make any money,” Singhal added. In New Delhi’s luxury mall DLF Emporio, reputedly India’s most expensive, tenants have to pay Rs900 per sq. ft, real estate consultants said.
And it’s not easy finding the right space in the right location for retailers, who also complain that many malls are badly located and designed, as well as shoddily managed.
Many developments are behind schedule. Ajit Joshi, who heads Infiniti Retail, part of the Tata group, is keen to open an outlet in downtown Mumbai as he expands the Croma chain of stores selling consumer electronics and durables.
“What we want is about 15,000 sq. ft of space, but we won’t get it even if we are ready to pay,” Joshi said. In other areas, “if you are lucky and space is available, the rates are so exorbitant it becomes unviable.”
Some mall rentals have risen by 50% in the past year, and developers are trying to wriggle out of old lease agreements under which tenants were offered cheaper space, said Pranay Vakil, India head of property consultancy Knight Frank.
Developers are today in a position to quote a price and tell retailers to “take it or leave it,” he said.
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First Published: Mon, Dec 24 2007. 12 57 AM IST