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Business News/ Companies / 2008 mall space estimate drops one-sixth on sagging demand
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2008 mall space estimate drops one-sixth on sagging demand

2008 mall space estimate drops one-sixth on sagging demand

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New Delhi: Weakening demand for retail space is prompting shopping mall developers to stall projects, which could result in a shortfall of millions of sq. ft in the supply of retail space this year, according to real estate consultancy Cushman and Wakefield.

(DWINDLING APPETITE) Supply of mall space across India is expected to fall short by as much as 3.43 million sq. ft in 2008, Cushman and Wakefield said. The consultant, which had projected 20.67 million sq. ft of additional mall space to be ready in 2008, has revised the forecast 16.6% lower to 17.24 million sq. ft.

In the second quarter of 2008, locations such as the National Capital Region (NCR), comprising Delhi and the suburbs of Gurgaon and Noida, and Mumbai saw the highest decline in the supply of mall space from what had been projected earlier, Cushman and Wakefield said.

According to online brokerage India Infoline Ltd, oversupply in mall space has pushed up vacancies to 9% in the NCR.

Some retailers say the shortfall is a temporary phenomenon.

“In the case of malls that are already in the construction stage, developers just cannot undo it...it can only get delayed by a few months here and there," said Mayur Toshniwal, chief executive officer (north) at Pantaloon Retail (India) Ltd, the country’s largest listed retailer. “The malls that were expected to come up in second quarter will now come up in the third or fourth quarters," he added.

Cushman and Wakefield said some design rejigs at malls under development were partly to blame for the delays and the resultant shortfall of space. A number of projects have been redesigned close to completion, either because of tenant requirements or infrastructure changes, according to Rajneesh Mahajan, the firm’s retail head.

“Typically a mall caters to over 100 tenants and during the leasing process, developers sometimes need to incorporate the tenants requirements in order to ensure better quality malls," he said.

The projected shortfall, industry insiders said, is unlikely to result in mall space rentals, which are already high, going up. That’s because retailers have been shying away from leasing mall space in recent months citing high costs and are moving to cheaper locations. Rentals rocketed to Rs300-600 per sq. ft a month in recent months—more than double the level two years ago, according to experts.

“The pace at which the retailers were signing up space earlier has slowed down," said Saket Bhatnagar, principal consultant for retail at Technopak Advisors Pvt. Ltd.

“That is because of the high rentals. So they (the retailers) are adopting a wait-and-watch attitude in anticipation that rentals would come down and that has resulted in less properties signed up by retailers," he added.

Pantaloon, for example, has put leasing of new properties on hold because of high rentals although its expansion plans have not been immediately affected.

Real estate developers launched hundreds of malls across the country in recent years, buoyed by the spread of retail chains that promised to change the way Indians shop. The mall culture and organized retail are a relatively new phenomena in a country where consumers have traditionally done their shopping at mom-and-pop stores.

“Developers usually try to build malls and then they either lease out space or sell it," said Kaushik Sengupta, vice-president of sales and marketing at New Delhi-based developer Eros Group. “But they don’t hire experts to run the malls, which is leading to a lot of retailers exiting from malls and moving to high streets," he added.

Rentals have even contracted 20-30% in some unfavourable locations, according to Sengupta.

Increasing project costs— driven by the rising prices of steel and cement—are adding to developers’ woes and contributing to delays. The Eros Group said such factors will affect the delivery of three of its under-construction malls in New Delhi and the suburbs of Dwarka and Faridabad.

Sengupta said a lacklustre response to malls in recent months is prompting developers to divert funds to residential projects that provide instant returns.

“Revenue realization from malls takes time," said Sengupta. “In a mall, you first build it, lease out space to a retailer and then sell space at an average return of 10%."

DLF said its projects are mostly on course. “But there have been some delays owing to external factors such as government approvals," a spokesman said.

shabana.h@livemint.com

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Published: 10 Jul 2008, 10:36 PM IST
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