Indian malls lose sheen, 40 downed shutters in last 2 years

Tesco is the first to enter multi-brand retail despite the government liberalising the FDI regime 15 months back in September 2012 and Tesco's entry is on the back of a very important relaxation made by the Indian government and one that is expected to finally open FDI floodgates; for retailers are now permitted to buy up to 51 percent in existing stores of domestic retailers.

So Tesco along with Trent will operate in India through a chain of stores like Star Bazaar, Star Market and Star Daily. Carrefour, the world's second-largest retailer, is expected to be the next giant to announce its entry into Indian multi-brand retail and many other Indian retailers are expected to go shopping for new foreign partners.

However, India’s glitzy malls are quickly losing their sheen - poor revenue models, exorbitant rentals, lack of specialty outlets, low-brand pull and last but not the least, sheer mismanagement, all of this can be blamed for the dire state of the malls. Vacancy levels are alarmingly high, prompting developers to defer mall openings.

As many as 40 malls have downed their shutters in the last two years. Cushman & Wakefield says the opening of 18 malls have been deferred in 2013, 10 of which are housed in the National Capital Region (NCR). That doesn't come as a surprise considering NCR's mall vacancy is highest in the country at a staggering 55 percent. Mumbai is a close second with 52 percent vacancy, followed by Ahmedabad and Chennai.

Sanjay Dutt, Executive MD, Cushman & Wakefield - South Asia, says: “The first generation shopping centers were not right sized, not planned properly, there are exceptions, I am not saying all shopping centers got built like that, but mostly they never got sized properly, not the right tenant mix, not the right location and developers did not put in a core management team to manage it properly.”

The eight year old Atria Mall in Mumbai's prime Worli is the latest mall to close down business. The promoters have put this mall on the block and hope to raise about Rs 1,000 crore from the exercise.

Other failed malls include Navi Mumbai's Full Stop Mall, Gold City Mall in Vashi, Mumbai's Palm Beach Galleria Mall, Star City Mall in Delhi's Mayur Vihar, and Spencer's Plaza down south in Chennai.

Dutt says: “Blackstone has built up a portfolio of 25-30 million square feet of office, why not shopping centre? They would love to build a shopping centre, but there is just no quality shopping centre and it's not a FDI compliant investment product from their point of view, IT parks are. So if today somebody wants to build a shopping center, they do not have access to capital, land is expensive, cash flow situation is quite severe, so every developer wants to build only housing.”

It is pretty clear; we have an oversupply of malls. Global retail giants are awaiting political stability and an insight into BJP's stance on FDI and multi-brand retail in case it comes to power in 2014, therefore committing big bucks is not helping mall developers. But high streets on the other hand continue to do well. An oversupply of malls has not helped and the political logjams are only making it worse. Foreign retailers likes Tesco and Carrefour fancying to exploit India's demographic may have to wait a while for political parties like the BJP and AAP that are intending to lead at coalition at the Centre, causing a dampener for international retail majors.

Dutt adds: “Commitment from global players like Walmart, Carrefour, Tesco, Unico, H&M are game changers for Indian real estate and retail sectors. The reason I say that is we think we are disturbing the peace of the high street or the unorganised sector. In my opinion these corporates bring expertise which has been developed over a very long period of decades, logistic supplies, software solutions, training and skill development of people required to run a profitable and well managed business which nobody is able to build in the country.”

Analysis says that Indian malls today are operating at investment minus 20 percent and there is no room for correction in shopping centre rentals as majority have moved to revenue share model. So it is only infusion of foreign direct investment that will bolster mall revenues and with many foreign retailers queuing up it will indeed be a saviour.