Retail oversupply - Power to retailers, pressure on rentals
A mammoth increase in planned supply of retail malls in India
March 02, 2011 | comments ( 0 ) |
A mammoth increase in planned supply of retail malls in India will increase retail companies' bargaining power vis-à-vis real estate developers. This, in turn, will keep retail lease rentals stagnant in 10 Indian cities in 2011. Further, smaller existing malls will face intense competition from upcoming larger malls, many of which are slated to start operations by 2012.
With real estate developers planning to double the number of malls in 10 major cities in India, theretail real estate market faces the prospect of excess supply. CRISIL Research studied the retail realestate market in 10 cities in India - Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai, NCR, Pune, Chandigarh and Kochi - which house more than 85 per cent of the retail area in the country. Developers are planning to add 242 malls by 2013 to the 255 malls currently prevalent in these cities. This will add about 96 million sq ft of retail area to the existing 72 million sq ft. Based onexpansion plans of retail companies, demand for retail area would be about 34 million sq ft during theperiod, creating a significant demand-supply mismatch.
The excess supply will keep retail lease rentals stagnant in 2011, even though rentals have been at 35-40 per cent discount from their peak levels in the first half of 2008.
"The supply pressure was already being felt by real estate developers in 2010. Developers have been losing bargaining power to retail companies over the previous two years, as additions in the retail space has outpaced outlet expansion by retail companies," points out Mr. Nagarajan Narasimhan, Director - CRISIL Research. "Despite retail sales rising by around 25 per cent in 2010, retail lease rentals increased only marginally by 3-4 per cent. This clearly shows a decisive shift in bargaining power to retail companies."
As per the CRISIL Research study, the average area per planned mall will be about 400,000 sq ft, almost 40 per cent larger than existing malls. This will magnify the challenges faced by retail real estate developers. "The new larger malls, which will attract retail companies with their sheer size and better facilities, will erode the competitiveness of existing smaller malls that are located within 8 km of each other," adds Nagarajan Narasimhan.
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