Mixed development is the key9 min read . Updated: 09 Sep 2012, 10:46 PM IST
Mixed development is the key
Mixed development is the key
New Delhi: Mixed-use land development is the way forward for a sustainable commercial real estate business in India, panellists said at the Mint Conclave on Commercial Real Estate: Strategies Shaping the Future held on 22 August.
Panellists emphasized the need for better designs, newer business models such as revenue sharing and having the right tenant mix. The panellists were Samir Jasuja, founder and chief executive officer, PropEquity Analytics; Anil Sharma, chairman and managing director, Amrapali Developers; Mudassir Zaidi, regional director, north, Knight Frank India Ltd; Ravi Saund, chief operating officer, CHD Developers; Chintan Patel, director, real estate practice, Ernst and Young; Sunil Dahiya, managing director, V Corp.; Rohit Raj Modi, secretary general, Confederation of Real Estate Developers’ Associations of India (CREDAI), and director, Ashiana Homes Pvt. Ltd. Saurabh Kumar of Mint moderated the discussion. Edited excerpts:
Sharma: I would say it is between good and bad. We have a lot of commercial space lying unleased or unsold in different cities. The mall culture, which started in 2002 and geared up till 2006, was hit since the start of the global meltdown. But still there is demand in the market.
Jasuja: As we speak today, we have seen 36.7 million sq. ft of commercial space being absorbed in 2012. This compared with 2011 was around 30 million sq. ft and 2009 it was 19 million sq. ft. So if you see absorption, it is twice over the last two years. So we can’t really say commercial real estate is doing very badly.
But if you look at the supply, it has overshot the demand. And that is the key concern in the market today. Even if you look at the retail segment, we have had unprecedented completion of stock of 13.8 million sq. ft whereas last year it was 6.9 million sq. ft. We have been witnessing, thanks to the FDI (foreign direct investment) that came in 2005, the real effect of which started coming in 2008, a lot of completed stock. The demand has not been able to match up to the supply that has come in the last two-and-a-half years and that is primarily because of the slowdown in the economy. But if you compare it globally, we have been doing reasonably well.
Zaidi: Overall I think there is a slowdown compared with last year. This year, for example, we expect there would absorption contraction, which could be around 10% for this calendar year. The first quarter has been quite slow as well. The reasons are pretty clear. Fifty per cent of the absorption gets taken up by American corporations and whatever is happening in the US in terms of economy is bound to have an effect on further expansion plan. Twenty per cent gets absorbed by European corporations and that is getting affected as well. So overall it could be a softer scenario this year.
So problem does not lie in the demand but probably in the niche area. For example, why are malls empty? Because some developers sold it to investors who wanted to lease it at higher price which was not happening. So the occupancy did not come in. So we should look at long-term plans in terms of infrastructure and ease. I would say there is a lot of work to be done and everyone has to be a party to it.
Patel: I broadly agree with whatever is already said and would say that it is neither a good nor a bad scenario and somewhere in between. I think the market has stagnated, but the way India is growing today in terms of GDP (gross domestic product) growth compared with the rest of the world, India is still better off. The development cycle itself, in terms of what malls were earlier in terms of development and what they are today, is much better with larger format malls and much better design.
Dahiya: I would like to put (across) two points: one is on the demand side and other on the vacancy side. If we look at automobile sector there are cars that are not selling. Fiats and Ambassadors are not selling, so if you build buildings which look like Fiats and Ambassadors they won’t sell. That’s on the vacancy part. So the vacancy is mostly due to outdated design and planning.
On the demand side, we are 100 crore Indians out of which eight crore live in urban cities. If you are going to take 10% of this population that goes to services industry then we require 800 million sq. ft but we have around 250 million sq. ft available. So we are far away from the saturation point. So why are we looking only at dollar-paying tenant? Is he stronger than a rupee-paying tenant? Today our total banking and insurance sector is living out of rented accommodation. So these are the sectors which are yet to take of building demand.
Modi: I would agree that we have absorbed two times more than the last year. So there should be cheer but it seems like there is a inventory pile-up due to supply. The commercial real estate in India has been following a lag effect. When the economy kick-started in 2002-03, everybody was caught off guard and there was acute shortage of good quality commercial space, which led to skyrocketing rentals.
Since there is a herd mentality among the developers, by 2005-06 everyone was in the commercial real estate space without really thinking the whole model through. So you had a pile-up happening and by 2008, when liquidity crisis surfaced, everybody froze their plans by and large. Also the malls that got delivered this year actually started construction in 2007-08. So there is constantly a lag effect and that is where we need to rationalize the supply vis-à-vis the demand. Retail is still to show its teeth and once this segment matures, this inventory pile-up will look like yesterday’s story.
There are many malls in the country which have just one anchor store running and the rest are vacant. So is it a case of Fiats and Ambassadors?
Patel: The way a mall is constructed is very important. If someone walks into a mall, takes the escalator and reaches the food court without passing through the stores, you miss the boat. So designing of malls is very important and I think some newer malls have much more efficient designs and a lot of store frontage is created.
Modi: I agree that design is very important and I would like to add a point that the business model is very important. Malls cannot be run by the foregone era of selling shops. It rather has to be on a yield basis. So here it can be seen that maturity has dawned in the second era of mall development. So now there are serious mall developers going for the lease-based model.
So given the current conditions compared with 2005-06, would you sell more or lease more?
Modi: Well, that’s a conflict between desire and ability actually. The right way would be to own to lease and then enter into a Reit (real estate investment trust) kind of structure but for that a lot better regulatory and financial structure is required in the country.
Sharma: Well I would definitely want to sell more but there is one more model that I would go for: revenue-sharing model. Especially in tier II and III cities it is more viable because there are very few malls.
Jasuja: I would like to add here that mall management is very different from commercial space business. For a successful mall, you have to have the correct tenant mix. So if you are going to sell the shops out, you cannot manage your tenant mix. Also I believe malls are not succeeding because of super to carpet area ratio. It spikes the affordability of the mall. So I guess revenue-sharing model works because even if the tenant goes bankrupt the shop can be churned. Also, you need to go hybrid model—two floors of mall, two floors hotel and two floors of offices. That is how you can monetize.
Zaidi: I would rather say that the preference is towards large formats. Overall 70% space gets taken up by the information technology (IT) sector and that really looks at large format. Around 20% gets taken by BFSI (banking, financial services and insurance) which is fine with taking up smaller formats. So pan-India IT takes up about 85,000 sq. ft.
But does not it hold true for peripheral districts and not secondary districts?
Zaidi: That’s a move that we have seen. For example in Mumbai, Nariman Point, which has been a central business district, but in last two-three years people have been moving to Lower Parel or Bandra-Kurla Complex. The reason being that you do not have large formats available in Nariman Point. So what has come about is smaller formats taken up by people who want to be near the financial district. But the trend is towards larger formats where you do not have to deal with multiple landlords.
Do you think the international crisis in any way affected us here in India?
Saund: Not doubt we are a world player now. But having said that we are not affected that much. Probably, if we talk in percentage terms, then 20% of it would hit us. But if you have been hearing everyone, it is more about educating ourselves rather than what is happening overseas. So the developer has to accept new models, say revenue sharing, and the government has to put in effort into infrastructure. So one cannot just be sitting and blaming others. So I think we are strong as an economy and a crisis here and there won’t affect us so much that we come to a standstill.
Jasuja: I would like to differ here. Around 64% of our demand comes from IT and IT SEZ (special economic zones). We are completely dependant on the world with most of the IT business coming from Europe and the US. So we need a huge push in terms of FDI. If we do not see businesses from abroad coming in, we will not see the growth we saw in yesteryears. Look at retail. If multi-brand retailers are not going to come then who will occupy the malls? The domestic retailers are growing but at a very slow pace.
Patel: Historically IT and ITeS (information technology-enabled services) have definitely been the dominant occupiers but moving forward that may go down but whether that will go down below 50% I don’t know.
How can the commercial real estate space move forward, given the current scenario?
Modi: Developers will have to decide the product-mix keeping in mind the demand. A product should be thought through before bringing it to the market. So I think mixed development will help us solve a lot of these problems. And I think regulators will also have to think alike.....
Dahiya: We need to develop an ecosystem to attract FDI which (we) have failed to do till now.
Jasuja: We need self-liquidating projects. And mixed development is the only viable medium available because of funding drying up.
Patel: Mixed development products have more desirability from point of view of office, retail and hotels. So there is a good interplay then one business helps the other. Diversification helps.
Zaidi: As cities become bigger and as central districts become expensive, I think mixed development will be the way forward for the long term.
Sharma: And of course we need a proper support infrastructure for this to work.