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An overview of Indian retail realty sector

The Indian retail sector has witnessed an unprecedented growth over the last decade, driven by robust economic growth, rapid urbanisation and changing lifestyles and aspirations of the Indian retail consumer.

The retail real estate sector is a significant contributor to India’s economic activity. Though a quantitative measurement of the retail sector is difficult to derive through the Government statistics, the trade, hotels and restaurant sectors come close to giving an estimate of its contribution.

That component, in which retail (both organised and unorganised) is the dominant activity, accounts for around 18% of India’s GDP.  Within the services sector, this component is the largest contributor to the economy.

As per the estimates of the Associated Chamber of Commerce and Industry (ASSOCHAM) presented in one of its recent retail reports, the contribution of both organised and unorganised retail stood at 22% of GDP. This would mean that Indian retail sector size should measure closer to Rs 19.2 trillion in 2012-2013.

Retail realty growth

The Indian retail sector has witnessed an unprecedented growth over the last decade, driven by robust economic growth, rapid urbanisation and changing lifestyles and aspirations of the Indian retail consumer. From less than 1 million sq. ft. of mall space in 2001, the Indian organised retail sector has increased manifold. However, the ups and downs of the Indian economy had always taken its toll with changes in absorption and vacancy over the years.

Leading research institutions such as AT Kearney and ASSOCHAM estimate that retail realty sector to grow at around 15% y-o-y, over the next three–five years as against a 12%–13% nominal growth of India’s GDP estimated by the International Monetary Fund (IMF).

Going by that logic, the sector should reach a size of Rs 34 trillion by 2016. The sector is also an important contributor towards the socioeconomic well being of the economy as it employs close to 9.4% of India’s labour force, as per the association. In its current form, the retail sector in India is mostly unorganised in its structure, with the organised retail contributing a small 7% to the total sector as of FY2012.

However, this industry is witnessing a fast transition and it is estimated that the organised sector will record a growth rate of close to 24% CAGR to increase its share to 10.2% of the total sector by 2016–2017, as per ASSOCHAM. As of 2016, the organised retail sector would therefore touch the size of Rs 3.5 trillion.

Mall stocks to go up

After displaying stellar growth, the retail scenario in India took a beating during the years after the global financial crisis (GFC). It bounced back in 2011 with the completion of malls that were in the pipeline and dropped again with a decrease in supply and net absorption in 2012.

“In the coming years, we expect to see a moderate inflow of fresh supply of mall space and a lukewarm demand for malls at poor locations and of inferior quality. This is expected to marginally increase the vacancy in India’s organised retail stock,” says a report by Jones Lang LaSalle, a leading real estate research firm.

Up in vacancy level

All the seven cities in India, except Mumbai, are likely to experience increase in the vacancy levels in the midterm of the coming three years. As demand is likely to be concentrated in malls in appropriate locations, based on sound research on cluster and consumer pattern, says the report.

“We can see the higher change in Hyderabad with more than 15% increase because of poor performance in the absorption front. However, Chennai and Delhi—with a marginal increase—and Mumbai—with a decline in vacancy rate—could remain the better performers. We also expect a significant increase in the Delhi NCR stock in the coming three years and Hyderabad stock getting nearly doubled in the said time frame,” say the authors of the report.

The existing high vacancy in malls in Mumbai and in Delhi NCR could also be attributed to the polarisation in the demand for malls in these cities. The malls that are in good locations and are backed up by the sustainable consumer community suitable for them are helping them perform well with large footfalls and good conversion. 

Meanwhile, overambitious projects with poor designs at times coupled with poor locations contribute to higher vacancies within the vicinity and the rest of the city. Even with the expected correction in supply in the long run, the vacancy is expected not to change much as some of these projects are under construction and would be operational in the midterm.

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First Published on Oct 10, 2013 11:05 pm
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