There are only limited properties in prime areas that fulfil all the criteria of the retailers. Obviously the property owners know this and hence pump up the rentals to a number that is difficult for any retailer to justify.
Shikha Pandey Malhotra
With FDI in retail, everyone is talking about how retail is the future of Indian economy and how all large and medium sized retail chains are eyeing the Indian market. Mumbai being the financial capital and fashion hub of India is obviously on the top of the list when it comes to any retailer’s priority. And this was the thought which suddenly made the otherwise sluggish real estate market of Mumbai stir a little.
What followed were investors looking at commercial showrooms and shops to be a lucrative investment option. Numerous upcoming projects had commercial showrooms or shops on the ground floor. But real estate in Mumbai has always been a high stake transaction and it has never been an easy one to crack.
Initially a whole lot of brands took up a whole lot of spaces but soon realised that they needed to be more stringent in their terms and policies because a lot of legal aspects of many of the prime properties was in a grey area. And hence the phase of tussle between retailers and property owners started. Let’s briefly have a look at what are the factors that create this tussle:
- Mumbai real estate is a completely disorganised sector. While there are companies who are looking at making this more organised, it is still a long way to go. There is no standard process followed while getting a deal done. The retailers are unable to offer too must flexibility to the property owners since there are certain standard guidelines that have to be followed to ensure security in the long term. Hence you never are really sure unless the property registration is done or sometimes even after that.
- Ever growing rentals. Mumbai has few areas that are every retailer must have like Bandra, South Mumbai etc. Now there are only limited properties in these prime areas that fulfil all the criteria of the retailers. Obviously the property owners know this and hence pump up the rentals to a number that is difficult for any retailer to justify. Today a property on Linking Road, Bandra West would have a rental of anywhere between Rs.400-Rs.500/sqft on build up.
- The investment and ROI battle. The retailers have pre decided budget keeping in mind their ROI calculations. The property owners on the other hand have their own expectations in terms of the rentals. And for the two to match is a herculean task. To bridge this gap most of the retailers also offer a revenue share to the property owners that ranges between 13% to 18% (sometimes even more) share of the net profit. Though there are takers of such propositions but most of the times this is not the first choice of the property owners.
- Ghosts of the past. The Mumbai real estate is still gripped by the age old systems like pagdi, trust land, lease land etc. These create their own issues as there are no clear guidelines as far as sub-leasing these type of properties is concerned.
- Government Policies: The government policies also add to the complexity. BMC rulings like 41.5% of the total rental income to be paid as tax annually etc lead to rental hikes and uncertainty in the mind of the property owner to go in for a long lease. Also a lot of properties in Mumbai are not passed as commercial units and to get them regularized is a huge cost to borne by the property owners. Most brands today would not move into any property which is not passed as commercial shop/unit.
- The lurking trend of redevelopment: With numerous properties going in for redevelopment in Mumbai, the challenge of long term agreements and lock-ins becomes a major concern for the retailers. The decision of a society to go into redevelopment is sometimes sudden and then the retailers have to face the brunt of the same. Because of this, the redevelopment clause has become so popular in the agreement entered between the two parties.
- Master of the ceremony aka Real Estate Consultant: But after all of this, God forbid, if either side is represented by a confused or not so seasoned real estate consultant, the deal is sure to never go through or even if it does, it might go through with a wrong note. None of the brokers today have exclusive properties as a result of which they are fighting within themselves to get the major share of the brokerage without realising that they are adding to the chaos. It’s only the few handful professional consultants who know how to manage their clients, the owner and other partners in the deal and are the ones who are in the game for a long run.
Despite all of this and more, the real estate sector is still remains to be the most dynamic sector. Though the tussle will go on for few years to come, but with professional companies taking over brand space sourcing and hopefully with the government support, the relationship between retail and real estate in Mumbai will see some rosy days.
The writer is Co-Founder of Gemideals.com, a real estate consultancy firm.You can now invest in mutual funds with moneycontrol. Download moneycontrol transact app. A dedicated app to explore, research and buy mutual funds.