Re­tail­ers Halt Ex­pan­sion, Await­ing Real Es­tate Price Cor­rec­tion

Shopping Center News - - CONTENTS - – By Dr. Ru­pal Agar­wal, Chief Strat­egy Ofͤcer, Your Re­tail Coach

Com­mer­cial real es­tate has al­ways been seen as an as­set where only in­sti­tu­tional in­vestors or HNI’S can in­vest, which, how­ever, is chang­ing. Many com­mer­cial in­vestors are now get­ting into the re­tail real es­tate play

Whether we like the crowded shop­ping malls com­ing up every­where or not, real es­tate is one of the most prom­i­nent point­ers of a coun­try’s growth and is one of the ma­jor av­enues of in­vest­ment for peo­ple. The strength­en­ing real es­tate mar­ket in terms of de­mand and prices have made an in­vest­ment in the com­mer­cial real es­tate a very proͤtable op­tion. That is why com­mer­cial real es­tate has al­ways been seen as an as­set where only in­sti­tu­tional in­vestors or HNI’S can in­vest, which, how­ever, is chang­ing. Many com­mer­cial in­vestors are now get­ting into the re­tail real es­tate play.

In­dia is seen as one of the top mar­kets giv­ing great re­turns, es­pe­cially in the com­mer­cial and re­tail space. The com­mer­cial seg­ment in In­dia has been do­ing very well. In 2015, some 38 mil­lion sq. ft. re­tail space was taken up.

In 2016, 46 m sq. ft. was taken up In 2017 about 40 m sq.ft. space was closed. The Delhi NCR, Mum­bai, and Ben­galuru had al­ready seen more than 180 re­tail­ers en­ter­ing or ex­pand­ing their op­er­a­tions in the coun­try. In­ter­na­tional fash­ion brands and the do­mes­tic food and bev­er­age seg­ment led the de­mand for qual­ity re­tail space dur­ing the year.

There are 6 ma­jor fac­tors af­fect­ing real es­tate prices. They are Land, Con­struc­tion Ma­te­rial Costs, Labour Cost, Cost in­curred to get ap­provals and Tax­a­tion & bor­row­ing costs, & RERA.

Land: As land is a ͤxed as­set, it gives the sec­tor a high ca­pac­ity to max­imise ad­van­tages. This works on a model in which a busi­ness can be started by tak­ing loans as many times as the value of the as­set is. As there are no strict land rules and reg­u­la­tions and the mis­man­age­ment of land records makes the land pur­chase very risky.

Con­struc­tion Ma­te­rial Costs: Sim­i­larly as all raw ma­te­rial costs, also shows atrend mov­ing up­wards with ris­ing labors & fuel cost. Al­ter­na­tively with tech­nol­ogy play­ing a cru­cial role, new ma­te­ri­als are in­tro­duced that help in con­trol­ling costs and also pro­vide al­ter­na­tive so­lu­tions to con­ven­tional con­struc­tion ma­te­ri­als. For ex­am­ple, man­u­fac­turer sand in place of river sand is used.

Labour Cost: In spite of a huge work­force in In­dia, the la­bor cost has al­ways seen a hike in the in­dus­try.

Ap­proval Cost: As ap­proval costs can go as high as 15 per­cent of to­tal sale price in large met­ros, this fac­tor also leads an in­crease in the price. This in­cludes de­vel­op­ment charges, Pre­mi­ums, and cess which is paid so that the bet­ter in­fras­truc­tural fa­cil­i­ties can be pro­vided to the ci­ti­zens. Tax­a­tion & bor­row­ing costs: On top of all other charges there are taxes in­curred for Stamp duty, reg­is­tra­tion, GST, etc. to prop­erty buy­ers. With the in­tro­duc­tion of RERA by Gov­ern­ment of In­dia, devel­op­ers will be un­der se­vere pres­sure to take all ap­provals and de­liver the pro­jects on time. This law is a great boon for the end user, which will re­sult in re­duced in­ven­tory in mar­ket. The cost in­curred by the devel­op­ers to get all the ap­provals on time, plus the pres­sure to de­liver the prod­uct on time will re­sult in ad­di­tional pres­sure on the cap­i­tal ex­pen­di­ture for devel­op­ers.

So from all this, it is pre­sumed that there will not be a crash in real es­tate prices. We might see a slight cor­rec­tion in prices but not a crash. Prices will re­main stag­nant for a long time.

In­dia’s real es­tate mar­ket has been los­ing mo­men­tum for quite some time as the coun­try’s econ­omy re­mains un­der stress. The pri­mary rea­sons for the slow­down are strict mon­e­tary reg­u­la­tions due to high in­fla­tion, new norms for lend­ing to the real es­tate sec­tor and prop­erty prices touch­ing peak lev­els.

Rea­sons be­hind the slow­down in real es­tate sec­tor in In­dia

In­creas­ing real es­tate in­ven­to­ries in the ma­jor cities due to slow­down Un­sta­ble eco­nomic con­di­tion of the con­sumers

In­crease in price due to higher costs of pro­duc­tion

De­clin­ing con­sumer trust due to de­lay in com­ple­tion of pro­jects In­tro­duc­tion of tech­nol­ogy-ori­ented re­tail spa­ces

Re­gion speciͤc con­sumer de­mand

Ex­pected fu­ture of real es­tate in In­dia A com­mer­cial prop­erty can be a small shop, a hous­ing com­plex or a shop­ping mall. Each of these prop­er­ties should be looked at from dif­fer­ent an­gles- amount of in­vest­ment, proͤle of ten­ant, re­turns, exit op­tions and the risk as­so­ci­ated.

Thus re­tail­ers who are think­ing to ex­pand the busi­ness shouldn’t wait for the real es­tate prices to in­crease or to de­crease. Even if few points above look far & dis­tant they will im­pact the mar­ket in next 3 to 4 years. And ex­actly when many will start think­ing that In­dia will defy all eco­nomic laws and when peo­ple will feel prices will never fall, it is then that a crash will ap­pear.

Dr. Ru­pal Agar­wal

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