Realty check : Are malls sustainable?

Real estate industry is on the surge, and keeping pace with it is the retail industry, a key sector attached to it. India has been ranked as the fifth emerging retail markets by global real-estate consulting group Knight Frank, and the group has predicted an impressive 20 per cent growth for the organised retail sector in India by 2010. There are only 137 malls in the country at present however it can actually support 1,000 malls and shopping centres in more than 500 towns and cities. Though the malls and large-format grocery stores might be crowd pullers, but it is only 25 to 30 per cent of the top-end consumers who actually shop in these malls.
Approximately 3/4th of Indian consumers, feel uncomfortable shopping in a sanitised, air-conditioned, steel and glass environment. They still prefer a traditional way of shopping in high streets.

Mall development in India
There is insurrection of mall development in India. Approximately, 300 malls are expected to be operational in India by 2010. However, retail experts, mall developers and retailers are not unanimous regarding the development of malls in India. Presenting the current mall scenario in India, Mr Mayur Toshniwal, Vice President and Business Head (North), Future Group, says “In India we see a robust retail industry trend for next two years. With organised retail sector being at the inflection point of the explosive growth, more and more projects are under pipeline. It won’t be surprising if we see 300 to 400 more malls in the period of next 24 to 36 months. However, a majority of the projects are substantially behind schedule.”
Supporting the views of Mr Toshniwal, Mr Bappaditya Basu, Vice President - Retail Services, Trammell Crow Meghraj, says, “Real Estate in India does not have deadlines. It is taken for granted so there will be delay. It is an untold truth. The journey of real estate in India from mere sustenance to a cherished self-image has been long and arduous. The demand for property far exceeds supply.”
Representing the retailer’s opinion Mr Pattabi Rama Rao, President, Australian Foods India Limited and Director Landmark Limited, informs, “As per the reports presented by Retailers Association of India, we have 114 malls in India and nearly 285 malls are expected to come up in India over the next three years.”
Mr Rohit Malhotra, CEO, Realtech Group that is developing the City Emporio Mall in Chandigarh and the Capitol City Mall in West Delhi is confident about the group’s deadline for its projects. Mr Malhotra informs, as far as the City Emporio Mall in Chandigarh is concerned, it is on schedule and we will be delivering it on time, within one year from the start of construction.
Further explaining the reasons for delay in mall construction he says, “From the time a project is conceptualised to its completion delays can take place due to a multitude of reasons.”
Presenting the prevailing conditions, Mr Gurpreet S Randhawa, Senior Consultant Technopak Advisors Pvt. Ltd. informs, “The total number of malls to be developed in 2006 were 137. Of these only 92 malls were new. Rest all are in the various stages of completion.”

 

Mall development – the process

Before going into the depth of the controversy, regarding the delay in the malls let us first understand what it all takes to develop a mall.

Presenting an experts opinion Mr Basu explains, “Once the land is acquired, either through outright purchase, joint venture or buying stake, any mall developer first takes all approvals pertaining to the land, project and usage. Once that is approved simultaneously he appoints an architect, project consultant and marketing consultant.  The project consultant decides the cost of the project whereas the Marketing consultant decides the enterprise value of the project. It may be an international property consultant or in house consultant who zones the mall and decides the retail mix.  After that the leasing process starts out initially with hyper markets, departmental stores, and multiplexes. Once an assured 40 to 60 per cent of ‘Letter of Intent’ is received, the mall developer starts the construction. Generally without any unforeseen circumstances the construction takes 20 to 30 months time for any mall of size 500,000 sq. ft.  The leasing for the vanilla stores starts once visible portion of the structure is ready. Some developers prefer to hold prime space within the mall to be leased out after the mall is complete and ready to open for international brands at premium rates. Simultaneously, few developers sell it to investors also for raising capital for the project. Once the mall is running successfully, the management of the mall including facilities, event and security is outsourced for the smooth functioning of the mall.”
Presenting the retailer’s opinion Mr Rao informs, “Retailers get in touch with mall developers, agree upon location, terms and conditions/commercials, sign LOI and thereafter lease agreement.”

 

Why the delays?

Considering the above facts, it is proved that malls are delayed. They are far behind their delivery schedules. At this point of time the matter of concern for us is the cause responsible for the delay in the completion of malls. Looking at the positive side, the retail sector is set to witness intense competition if by a remote chance the projects are completed on time.

Elaborating on the reasons responsible for the delay Mr Toshniwal says, “The delay in the process is due to project planning, licensing, other procedural approvals, and very importantly, actual execution.” Further, elaborating the retailer’s perspective he says, “While executing a project, mall developers consider several assorted factors. It varies from planning, branding, marketing, and promotion to licensing and approvals. It would be highly convenient to retailers, if process like licensing and approvals (for fire, pollution, safety etc) are simplified.”

Justifying a mall developer’s position Mr Malhotra, opines, “This is one subject that is debatable and is not in the hands of any developer. But, delays can take place at that end as there are too many clearances to be taken for any development. A single window clearance is the answer.”

However, Mr Yashwant Sahay, Vice President, Marketing Aeren R Enterprises, an infrastructure development conglomerate engaged in value added real estate projects of retail, entertainment and speciality malls, group housing and various other commercial projects and presently developing Festival City, a theme destination mall in Ludhiana says, “The delay happens when you apply for some necessary approvals. You may consider that approvals will take six months and it actually takes 10 months so the schedule is four months behind. Till you have the approval you can’t start anything. So, then you start mobilizing, you short list the contractors. But after four months you have to rework on the cost of construction as rates change. As you go along you will find yes we had this plan in our mind then some architect suggests something or any changes in the plan, all these changes coupled with problems like labour problem, short of staff etc. leads to delay in the delivery of the malls.”

Mr Darpan Kapoor, Managing Director, Kapsons, opines, “The major factor of delayed projects is the investment and finance planning required in the project. Secondly the Govt. Approvals required at different stages of development. Sometimes, the project is at the last stage of completion wherein some or other MC problems come over and the project gets delayed.”

It is not that all the mall developers have been able to meet their deadlines and thus even Kapsons have to face these problems because the capital invested in these projects is blocked and also the kind of hype and excitement created while starting the project gets diminished with the passage of time, as the project delays, which also impacts the customer interest in the Mall and therein reduces the initial market value of the project.

Presenting a retailer’s perspective Mr Rao, says, “There can be various reasons for the delay including construction delays, approvals, funding but these are primary issues faced by the construction companies.”
Mr Basu, opines, “Given the number of problems that a builder faces either from the authorities or from tenants and also the declining profit margin, most of the mall developers do not start construction until at least 45-60 per cent of these malls are not pre-booked. The list may be never ending. It can vary from unavailability of funds, restriction by the government, by laws of the state, unavailability of good tenants to environmental clearances from the centre, height restriction, and inability to foresee profits or a bigger competitor making a mall in the vicinity. From the developers point, greed, tunnel vision, short term profit, may also lead him to delay the mall.”
However, Mr Randhawa, informs, “Funding from investors, regulatory approvals, management issues, change of plans etc are the major reasons.” He further explains, “While big professional real estate developers take prior approvals before starting the project, a lot of small developers announce the plans well in advance in order to grab attention and also as part of advertising gimmick and try to get tenants/buyers, for getting the working capital.”

 

Investment by developer, investor and retailer
Now, after analyzing the various causes responsible for the malls being behind their schedule of delivery, it is important to see who all are suffering due to this delay. But before going into the details for the delay it is important to know the break up of the investment.

Mr Sahay, opines, “Broadly there are two ways of making a payment. One is a down payment, when everything is paid at the time of booking or with in the month of booking. The other is the construction link plan. The third variation can be a time bound plan. But the payments must be complete before taking up a possession of the outlet in a mall. When a retailer pays the last installment he is given the possession. Then after taking the possession a retailer works on the fit out of the store. Depending on the scale and the planning that the retailer has done on the fit outs, it takes 2 to 3 month’s time. At least 90 per cent of the retailer should be able to make their stores ready when the mall commences its operations.” Technopak believes, “There is no standard practice. For lease the advance could be 3-6 months of rentals.”

According to Mr Rao, “Normally Mall developer requests for a 3 to 6 months rent as advance, the same is paid in 3 equal instalments i.e., on signing LOI/ signing lease agreement/ taking possession respectively.”

However, Mr Kapoor, opines “The percentage of initial investment both by the investors and the retailers, basically varies as per the mall authorities. Whereas investors require Rs 25,000 – 50,000 per sq.ft to buy a shop and the retailers have to pay at least 2-3 months rent in advance for the same.”

 

Who is the loser?
The growth of real estate is the outcome of the desire to make profits. But the delay in malls leads to loss.  There are mainly three investors. The maximum investment is done by the mall developer, then the investor and the retailer.
Mr Basu, opines, “The developer is mostly safe as before the mall is up and running, he might have sold it on piece meal basis to small investors or its big chunk to banks or to big investors. As the retailers are locked-in they might not be able to vacate/leave the property for 3 to 6 years as it might have been negotiated during the deal. But if the mall is a failure, the probability of developer’s success for future projects becomes negligible.” 
However, Mr Randhawa opines, “In such a case the developer (in case the property is leased) faces the threat of losing its tenants and hence the rental revenues. This would further, impact the loan reimbursement and in the end he might have to liquidate the property to repay the bank loan.”
Mr Rao, adds, “All three constituents the developer, the investor and the retailer are likely to be affected when a mall fails. The investor and developer face losses in the form of rental revenues whereas retailers face business revenue losses. The quantum of losses differs from one mall to another as well as from one business to another.”
Mr Sahay, says, “The developer also has to bear the cost. It is very unlikely, if he has borrowed money then he is losing money because the more time he takes, the more interest he has to pay. So he is definitely at loss. Retailer is a loser because if he plans to start business in May 2007 and he cannot start it say till December, his calculations have gone wrong. So everybody is suffering due to this delay.”

Mr Malhotra, believes, “The loss is borne by all concerned parties, be it the developer, investor (if any) and the retailer who has made his long time business plans to open a certain number of outlets in various locations.”

Similar are the views of Mr Toshniwal, “All the relevant partners, viz developers, investors and most crucially, the retailers incur substantial losses in case of failure of a mall.”

Loan facilities available
Mr Basu highlights, “India has come a long way, from, where once foreign investment was viewed myopically as a vehicle for import of technology, whereas now it is an integral lifeline to the growth of the economy. For bank debt, it is usually 50 per cent for the mall developers, retailers can take loan on the capital cost of the store, i.e., the amount used for fit-out of the store. For investors the amount can be up to 80 per cent of the value of the property.”

Mr Kapoor informs, “Various banks are offering various schemes and loan facilities to the retailers and investors. As the interest rates are increasing day by day, presently, it is 13-14 per cent per annum while earlier it was around 8-9 per cent.”

 

Malls on Red Alert!

Real estate boom in Punjab saw everyone riding at the pinnacle, there was a flood of mall development announcements. Anybody and everybody who had money to invest rushed to the real estate market to make a fast buck- that was from 2003 to 2006.

Recently, Punjab government withheld the permission for new mall projects as Punjab Urban Development and Housing Department is working on shaping up a new policy for planned urban development across the state of Punjab. Now the investment worth crores’ is stuck.

Clarifications are required from developers by the Urban Development Department on various accounts, including proximity to polluting industries and safety standards. A mall coming up in Mohali has been given 15 days time to answer the clarifications sought by the department. Two other malls coming up in Mohali, are also awaiting approval. Around 40 malls are coming up in Punjab, while eight to ten malls are coming up in and around Ludhiana, more than half-a-dozen are under construction at Zirakpur on the Delhi-Chandigarh Road. Majority of the malls are coming up in Amritsar, Jalandhar, Ludhiana and, even smaller towns like Bathinda and Patiala. A mall coming up in Panchkula with one of the best locations to boast of, has also been plagued by delays. Many malls in Gurgaon are finally being converted to office spaces, proving that not all malls succeed even if they are at the same location.

As for Punjab is concerned Mr Kapoor informs, “In total, 50 malls are coming up in North (Himachal, Haryana, Punjab, Jammu and Kashmir) out of which only two malls are operational i.e Mittal Mega Mall, Panipat and Ansal Plaza – Ludhaina with a total area of 2.7 lakh sq.ft, rest all other are either on verge of completion or many of them are in the delayed category list.”

 

Regarding the mall alerts Mr Basu, feels, “This might be a perception. All these malls are only announced. Most of them have no clearances. Some of them don’t have the land usage rights. So in a longer run only few will come up whose permissions, usage and plans are in place.”

Mr Malhotra, believes, “The developments are contiguous and concentrated in particular cities / areas without any feasibility studies being carried out. For example, in a certain area in Ludhiana there are 12 – 15 malls slated to come up in a row- the catchment area being the same how can any of these projects be viable?”
Trying to be little optimistic Mr Toshiwal, says, “We hope that this is a temporary phase and the developers are able to redress the procedural issues and get the projects back on track at the earliest.”
Mr Randhawa opines, “Due to rapid increase in urbanization, higher disposable incomes and increased penetration of modern retail – the demand for modern retail formats is on the rise. According to our estimate in the next 5 years, a total area of 5,000 lakh sq.ft will be required by the upcoming organised retail chains. Out of this 2,500 lakh sq.ft will have to come from modern formats like shopping malls. But the current plans of real estate developers reveal that only 1,430 lakh sq.ft of modern retail space is being envisaged in next 5 years. This would leave us with a deficit of over 40 per cent of requirement. Clearly there is a wide gap in the demand and supply. However, the real estate developers have to take cognizance of the fact that each property has to have its USP in order to be attractive and profitable”

 

Mall developer’s responsibility
Mall developer initiates the project. Though a mall developer’s investment is the maximum yet there are others who are relying on him. So the entire responsibility lies on his shoulders if the mall is not delivered on time, if it is a success or a failure. After all he is the one who has done the planning and invited people to invest in his project and he will be making the maximum profits or he has to loose the maximum in case of delay or failure.  Let’s see what retail experts, mall developers and retailers have to say,
Mr Toshniwal opines, “While minor delays are a part and parcel of any project execution, the developers have to be completely accountable for timely delivery of the mall. To that extent, yes, the credibility of a developer is dependent on this factor. They have to ensure that detailed planning and tight executions are very well dove-tailed.”
Mr Malhotra, says, “Depends for what reasons a mall is delayed. Please note that the developer has the maximum to lose in case a project is delayed or scrapped.”

More of real estate business then retail
Developing a shopping mall is a lengthy exercise. It takes nearly 2 to 3 year's time, which is a long period. The initial stage is all about real estate development and retail actually starts after 2 to 3 years time. In the meantime the project looses interest of the common people. Moreover, more then retail it is talked about in terms of buying and selling of space. So it has been felt that malls today have become more of a real estate business then retail. Mr Basu, opines “When countries grow, more people buy more things. More products become available. They need more shelf space. The result: a retail revolution. That's what's happening in India today. The retail industry is passing through a period of profound and accelerating change and consolidation and competition is quickly shaping some of the world's biggest mall markets. Another vital element of the change is the intimate bonding of retail success with consumer confidence. Ultimate winners will be those who continue to provide a value proposition to their customers in the leanest of periods and there are different ways of achieving this. While, there is an immediate oversupply in the near future. Malls with the right fundamentals i.e., tenants + management will continue to do well.”
Mr Toshniwal says, “This has been a problem with several projects, particularly in the past. However, now many mall developers are looking for long-term association with retailers, and both communities are working to provide symbiotic support to each other.”
According to Mr Kapoor, “Malls have become a real estate business these days. Many of such projects are being taken over or sold in Punjab and has become a real estate business instead of developing projects. The impact of the same is that with such transferring and selling, the project may prove beneficial for the original holder of the project but in turn increases the cost of the project which affects the rent cost of retailers, the initial investment and thereafter cost of the project increases leading to inflation and the ultimate loser is the customer who gets the products in relative high prices in the same area. So, the Government should make a policy of checking such projects so that only those developers should be approved who have an experience and a proper capital to start the project and get the same completed in time.”

 Contradicting the above statements Mr Malhotra,says,  “This is not quite true – A developer has to conceive, plan and execute a mall which is his core competence as a real estate developer and then the retailer comes into the development with his business which is to go out and reach his consumers. These roles are inter-dependent and complementary so there is no conflict of interest.”

 

Failure of malls
The success of retail development of any mall is subjective and would greatly depend upon the preferences of retailers and purchasing power. The success of a mall depends upon the number of footfalls it can attract and its potential to convert these footfalls, which in turn depends upon the successful design and occupancy in each site.

Mr Randhawa opines, “In case of leased malls, if the operations do not fly then all the members tend to lose. The business of each of the members is dependant on the other and it is a collaborative effort of all to make the development a success.”
Mr Basu believes, “Mall failure is a relative term. Some brands might not be doing well but not the entire mall as a whole. If most of the brands don’t do well then it can be a problem. In such cases most of the loss is of the retailers or for investors. Therefore, it is always advisable to take help of professionals property consultants before taking/booking space in any shopping mall.”

Wrapping up
From the above discussion one thing is for sure and that is malls are coming up in India in a big way. As for the delay in the coming up of the malls is concerned, many factors are contributing to it. Mall owners are justifying their position by saying that taking approvals from Government eat out all their time whereas retailers are worried as they have invested huge amount of money. Mall developers opine that they are biggest losers whereas retailers have very less to loose as their investment is just a few percent as compared to the investment by the developer. Mall owners are unanimous in saying that we can not have a cut off date for such kind of projects. The delay can be avoided if mall developers streamline their projects with better planning, better manpower availability, better technology, better quality and the Government minimise the approval procedures. If all these things are taken care of, it is for sure that India will have world class malls in near future.

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