Investors struggle to find, fund feasible malls

Investors struggle to find, fund feasible malls
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First Published: Thu, Aug 09 2007. 12 38 AM IST
Updated: Thu, Aug 09 2007. 12 38 AM IST
Mumbai: A construction boom and fast growing retail market are fuelling the development of numerous mall in India. More than 500 malls are expected to come up in India by 2009, but private equity and real estate funds are still struggling to locate and finance the right projects.
The funds are seeking to bankroll projects with the right retail mix, size and strategy but instead, all the investment managers are meeting with are developers with unrealistic growth plans, dubious title deeds, and unknown retailers with unhealthy balance sheets.
“It is a scary situation at the moment,” says Reit Property Management India director Alex Hayim which is yet to invest in a mall despite being in India for over two years. “One has to be very careful when it comes to shopping malls.”
While India’s organized retail sector, which is just 3% of the total industry pie now, is expected to grow expotentially by 40% a year to about Rs89,100 crore ($22 billion) by 2010, developers have set ambitious targets to add retail space in malls, dwarfing plans in other Asian cities. Around 103 malls are planned in Delhi and surrounding areas by 2009, Shanghai and Beijing will together just have an additional 56 malls coming up, estimates property consultants Cushman & Wakefield Inc.
“Picking up the right opportunity becomes a big question mark,” said Rajneesh Mahajan, national head-retail, Cushman & Wakefield. “It’s about the developer’s ability to construct, and then run those operations efficiently.”
Real estate funds—which are hoping to get larger play in the country’s market after restrictions were placed on bank funding on projects—see value in developing townships, commercial and residential projects, but are frustrated by the many start-up problems that plague the mall sector.
Malls come with new challenges, alongwith inheriting typical real estate problems—lack of transparency, restrictive regulations and valuation differentials.
Curbs on the entry of foreign retailers also has hurt projects. “There are not enough international retailers that these funds recognize,” said Anuj Puri, country head, Jones Lang Lasalle Meghraj, a real estate services firm. “Among Indian retailers, the bigger ones still have healthy balance sheets, but smaller ones don’t.”
Lack of parking, inferior surroundings and poor construction quality characterize India’s malls. More than 90% of current and planned shopping malls fall below international standards on specification and design, said a Jones Lang Lasalle report.
Funds also are questioning the way these malls are managed. “Today, there aren’t enough highly professional mall management companies as there are overseas. As a result, they wonder who will do promotions and get in additional footfalls,” said Puri, adding proven track records help investment decisions.
Funds are also not keen on developers who sell out space for a quick return, instead of adopting the leasing-out model, which is the norm internationally. Property executives believe the real problem lies in the lack of understanding and co-ordination between investors and mall developers. The solution is to combine technical expertise of specialists with the the local knowledge of developers, they say.
There is real value in mall projects, says Ramesh Jogani, managing director at Indiareit Fund Advisors Pvt. Ltd, which has invested in a mall, but only as part of a township project.
“A mall could double its value in 4-5 years,” Jogani said. “Apart from lease rentals, you can sell out to a strategic investor at a later date, when there is a surge in value.”
If the tenant profile is strong and the location and footfalls are good, everyone makes money, says Reit Property’s Hayim. REUTERS
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First Published: Thu, Aug 09 2007. 12 38 AM IST