By Subash Bhola
So far, 2012 has been a challenging year for most of the key sectors of the Indian economy and the retail real estate sector is no exception. The demand in terms of net absorption has remained subdued in the first half of 2012 amid careful expansion by retailers.
In the first half of calender year 2012, net absorption of retail space fell 57 percent from the levels seen in the year-ago period. The watchful stance by retailers, coupled with the lack of quality malls and the fact that some select quality projects postponed construction, were the main causes for the sluggish absorption.
In the past six months, only 2.3 million sq ft of operational retail space has been added to the market across the top seven cities. On the back of this small supply, the overall vacancy rate declined to 18.8 percent at the end of the second quarter of FY12 —- a drop of 140 bps from the fourth quarter of FY11. Because of the uncertain economic climate and weaker business sentiment, developers continue to be cautious about new mall launches.
In the first half of calender year 2012, 22 percent of the total retail supply became operational, with the remaining supply in advanced stages of construction and 51 percent of it ready for fit-out. As compared to other cities, Kolkata and Pune have higher pre-commitments in projects that are ready for fit-out and expected to commence operation inthe second half of this year with large spaces signed by anchor retailers and large-format stores in these cities. About 32 percent of the retail space expected to become operational in the second half of calender year 2012 is in the ‘50-100% structure ready’ stage.
In accordance with the preference of retailers, most of the recent absorption is skewed towards malls with better quality. This trend is largely prevalent in major Tier I cities such as Mumbai and NCR-Delhi. At the end of the second quarter of FY12, NCR-Delhi and Mumbai together accounted for 64 percent of the total retail space in India, housing 149 of the 240 malls currently operational in the country’s top-seven cities.
A modest increase of 1-2 percent in rents was recorded in select cities such as Mumbai, Chennai, Pune and Kolkata in the second quarter of FY12, while rents in other cities remained stable at the levels seen in . Of the top-seven cities, Pune saw the highest increase in rents – up by 1.6% – while Mumbai and Chennai each saw a rise of 1.0 percent. At 1.3 percent, the growth in Kolkata’s rents was moderate compared to the previous quarter’s sharp rise of 3.5%.
Persistently high core inflation and lower GDP growth forecasts for FY 2012-13 are likely to moderate consumer spending over the coming quarters. The absorption rate is predicted to moderate to 27% by end-2012, falling from the 41% figure recorded in 2011. This is due to subdued absorption in 1H12 and a low level of pre-commitment in the malls expected to commence operations in 2H12.
Because of to the limited availability of new malls and the low vacancy rates in the existing prime malls, retailers in cities such as Hyderabad, Chennai and Bangalore continue to actively lease space on high streets. A policy change could be a significant boost for absorption, and therefore supply; however, it is uncertain when the government will allow FDI in multi-brand retail.
Subhash Bhola is Senior Manager – Research, at property research firm Jones Lang LaSalle India