Impact of high realty prices

There have been increasing concerns about what the impact of rising interest rates will be on Indian retail properties. This is an issue worth discussing. Considering the current scenario, it is obvious that funding for new constructions will get dearer on the supply side. On the demand side too, there are far-reaching implications. Rising interest rates will compromise or reduce the purchasing power of young couples: as a large part of their incomes will go into servicing home loans, they will be left less for retail consumption. This, of course, might lead to significant consequences in the sector. However, there will be no acute shortage of funds. The fact that the rupee is steadily gaining value will cause increasing volumes of money to come in for cross-border money prefers staying in appreciating currencies. But, this has less favorable connotations too. Major Indian and foreign players entering the retail industry are bringing much enhanced cash flows into the real estate sector through FDI. These funds require a minimum return of 25 per cent per annum, taking into consideration the high input prices in terms of land and construction. Additional inflow of funds via FDI will therefore reflect in increased real estate prices for one must sell at a higher price in order to make a profit.

We cannot ignore the fact that escalating real estate prices are eating into the industry’s profit margins. I have often been asked if there is any feasible solution to this situation. In my opinion, the only viable course of action lies in negotiating percentage rents. This system would consist of a low fixed rent and an additional rent component linked to a retail property’s turnover. This could serve as a mutually acceptable way out. While rising real estate costs are a very real concern, I do not agree that this factor is causing a blanket slowdown of new retail ventures. At the most, it gives rise to a mixed situation. Some companies are indeed putting their retail ventures on the backburner as they anticipate a change in scenario. Others, however, are going ahead - real estate costs do not deter each and every player from wanting to capitalise on a market in full boom. There is certainly anticipation all across the board, but one can certainly not state that there is universal hesitation. Different players evaluate the real estate component of a retail enterprise in different ways. There is still a huge demand for retail spaces. While certain locations are doubtlessly in a consolidation phase, we are certainly not looking at a correction scenario.

As for interest rates, this factor has only a marginal impact on the demand for retail real estate. We will always have interest rate fluctuations, and we will always have demand for real estate. Real estate buyers across India act according to their individual investment plans, needs and buying power – and not all of them respond negatively to higher cost of credit. The market is in a constant state of flux as it balances the scales – but flux is motion. Only a complete standstill would be an anomaly on the real estate market.