Mumbai: Trent Ltd, the Tata group company that owns the Westside, Star India Bazaar, and Landmark chains, is considering setting up a fund to acquire and build retail space, said sources close to the development who did not wish to be identified. The move is a logical one for a retailer, said several analysts to whom Mint spoke.
Future Capital, the financial arm of Future Group—parent of retailer Pantaloon—has two real-estate funds: a $80 million domestic fund and a $350 million international one.
Further details on the Trent fund were not available and the company did not respond to repeated queries, including a questionnaire, on its plans.
Real-estate funds, despite concerns that the sector could be overheated, still remain a good idea in India, and several individuals and companies not related to the retail business have launched them. Anand Jain, a close associate of Reliance Industries chairman Mukesh Ambani, recently closed a $500 million Urban Opportunities Infrastructure Fund focused on real estate. There have also been reports in the media, unconfirmed by the Tata Group, that one of its companies, Tata Realty & Infrastructure, would launch a similar fund.
Such funds provide venture capital to real-estate developers for specific projects in return for a stake. The real-estate fund stands to benefit from appreciation in the value of these properties by the time they are sold.
“For Indian retailers, the objective is to acquire as many properties as possible in the shortest period of time as competition from domestic and overseas players’ increases. Considering the pace of expansion planned by most Indian retailers, there is a danger of balance sheets becoming over-leveraged if funds are locked in real estate. Besides, the regulatory hurdles in borrowing funds for real estate are plenty,” said Rakesh Biyani, head of the retail business, Future Group.
Biyani added that the arm’s-length principle is usually enforced between the fund and the retail venture.
Even as retailers hope to make money off real-estate—those that promote and manage a fund will get an asset management fee—they are increasingly feeling the need to cushion their balance sheets from rising real-estate costs.
A report by Merrill Lynch dated 28 March issued a ‘sell’ recommendation on India’s two largest retail stocks, Pantaloon Retail (India) Ltd and Shoppers’ Stop Ltd. The report voices concerns on profitability and points out that staff costs are up by 35% in the last three quarters and that rentals will rise by more than 15% this year.
The report, however, remains upbeat about the prospects of the organized retail business in India. A clutch of Indian retailers, including Pantaloon, Shoppers’ Stop and Reliance Retail—the retail arm of Reliance Industries Ltd—are expanding rapidly in an effort to increase organized retail’s share of the total retail pie in the country from the current 5%.
The corresponding proportion is 40-55% in South East Asia and 85% in the United States.
Trent, the sources said, plans to increase the number of its Westside department stores from 26 to around 55 in the next two years. It also plans to increase the number of its hypermarkets, Star India Bazaar, from one to 15 in two to three years. Real-estate developer DLF Ltd, in its latest red-herring prospectus filed with the securities regulator, states: “We have a memorandum of understanding with Trent to partner across their intended retail formats in our future malls occupying a minimum of 150,000sq. ft in each mall”. Trent Ltd did not confirm these numbers.
The Future Group, which has 51 Big Bazaars, 31 Pantaloon stores and seven Central and Brand Factory stores, has announced that its stores and formats will cover 30 million sq. ft by 2010. RIL is expected to invest Rs25,000 crore and is targeting 100 million sq. ft of retail space while Shoppers’ Stop is looking at 6.4 million sq. ft of retail space by 2010.
The Merrill Lynch report also points out that several retailers may not reach these numbers because some real estate developers are running well behind schedule in terms of timely completion of projects.
By creating real-estate funds to build malls, Indian retail firms may just be trying to ensure that their frenetic expansion plans do not remain on the shelf.