Mumbai: A majority of the new shopping malls will come up in metro cities over the next two years, reversing a two-year decline in such activity, as malls that developers had built in smaller towns and cities remained vacant as rising prices and slowing economic growth forced consumers to cut spending.

“In the next two years, the maximum number of upcoming shopping mall development is concentrated in tier I cities. Around 52% of the mall developments are coming in tier I cities as compared to 15% in tier II and 33% in tier III cities," said Pankaj Renjhen, managing director of retail services at property consultancy Jones Lang LaSalle Property Consultants (India) Pvt. Ltd (JLL).

The so-called tier I cities are seven in number—Delhi, Mumbai, Bangalore, Kolkata, Pune, Chennai and Hyderabad. Tier II cities are those that have more than 1 million people living in them. The remaining towns are categorized as tier III.

At the end of 2011, the smaller cities and towns had just 38.2 million sq. ft of retail space, whereas metro cities had 66.51 million sq. ft. But as the bigger cities started getting saturated, mall developers started constructing in smaller urban centres.

By the end of 2013, these cities and towns had 76.52 million sq. ft of shopping mall space, marginally more than the 76.04 million sq. ft built in the larger cities.

As the euphoria around the Indian consumption story wears off on slowing economic expansion, the focus has shifted to the metros.

For instance, Tata Realty and Infrastructure Ltd has decided that its next two mall projects will be restricted to metros. “Our focus will be tier I and metros," said Cyrus Engineer, head of sales and marketing at Tata Realty, a Tata Sons company. It will take some time for small towns to successfully host larger malls, Engineer added.

Tata Realty will build two malls in Bangalore and Gurgaon on the outskirts of Delhi in the next two-three years.

Private final consumption expenditure, an indicator of consumer spending, for the quarter ended 31 December grew at 2.5%, slightly higher than the 2.2% seen during the preceding three months.

The outlook for urban consumer sentiment is likely to remain subdued in 2014-15 amid reduced affordability, according to a January report by India Ratings and Research Pvt. Ltd, the local arm of Fitch Ratings Inc.

India’s economic growth rate hit a decade’s low of 4.5% in 2012-13. The economy is expected to grow 5.4% in 2014-15 and accelerate to 6.4% in the following year, according to the International Monetary Fund.

Against this backdrop, developers have realized that markets in smaller cities lack depth as consumers are still experimenting with national brands.

Smaller markets can hold only one successful mall, Renjhen of JLL said. Malls like Elante in Chandigarh by L&T Realty, the real estate arm of Larsen and Toubro Ltd, AlphaOne mall in Ahmedabad and Treasure Island in Indore, on an average do two-three times more business than the next-best shopping mall in the city because they have higher priced brands, he said

Also, new malls in a larger city often come up close to each other, causing oversupply in a particular vicinity, experts say. For instance, Pune saw nine of its 12 malls launch in the past three years, most within a 5km radius.

Malls are now repositioning themselves to survive the dampened outlook.

Inorbit in Pune, for instance, is positioning itself as a value offering as it looks at widening the customer base, said Kishore Bhatija, managing director and chief executive officer (CEO) of Inorbit Malls. Phoenix Market City, which is some 2km from Inorbit in Pune, has higher priced brands like Zara, Super Dry, Diesel and Guess.

Similarly, Amanora mall in the city has repositioned itself around its food and beverage offerings, which takes up the main space in the building, says Monesh Bhojwani, CEO of Amanora Town Centre.

After the 2008 global financial meltdown, organized retail in India has been on a roller-coaster ride. Even the government’s effort to open up single-brand retail in September 2012 and ease overseas investment in supermarkets in the past year hasn’t changed the dynamics of the retail industry.

For the past five years, organized retail has remained constant at near 10% of the $400-500 billion ( 23.4-29.2 trillion) retail industry, according to Anshul Jain, CEO of DTZ International Property Advisers Pvt. Ltd, a real estate consultancy firm. “The portion of organized retail is not growing and this is worrying," Jain said.

On the other hand, online retail is witnessing rapid growth with the likes of Myntra.com, Jabong.com and Flipkart.com. In the past two months, brands like Dorothy Perkins, a UK-based fast fashion brand, and fashion label Miss Selfridge have made their India debut online and not through brick-and-mortar stores.

Revenues at e-commerce firms grew to 13,900 crore in 2012-13 from 1,500 crore in 2007-08, according to a January report by research and ratings agency Crisil Ltd. By 2016, the number could touch 50,000 crore, it projected.

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