In­dian REITs – The Re­tail Op­por­tu­nity

Accommodation Times - - Editorial - By Su­vishesh Val­san, Se­nior An­a­lyst – Re­search & REIS JLL In­dia To read full ar­ti­cle visit - ac­com­mo­da­tion­

The draft guide­lines for trad­ing in REITs in In­dia have been in­tro­duced and al­lowed. For the very first time, there ex­ists a tool to chan­nel small sav­ings into the In­dian real es­tate sec­tor. Not sur­pris­ingly, sev­eral own­ers of in­comegen­er­at­ing prop­er­ties are now con­sid­er­ing set­ting up REITs. While com­mer­cial real es­tate projects have been popular as­sets to se­cu­ri­tise world­wide, mar­ket dy­nam­ics in In­dia cur­rently sug­gest that the re­tail sec­tor could be a ben­e­fi­ciary as well. Fac­tors un­der­pin­ning the po­ten­tial suc­cess of REITs in re­tail in­clude:

Low Va­can­cies In Su­pe­rior Grade* Malls

Over the past few years, de­vel­op­ers slowed down the sup­ply of mall space in In­dia be­cause of ris­ing vacancy rates fol­low­ing the eco­nomic slow­down. Prior to that, de­vel­op­ers were churn­ing out malls at a break­neck pace in re­sponse to a spurt in the or­gan­ised re­tail business. Back then, few de­vel­op­ers un­der­stood what the right in­gre­di­ents for a suc­cess­ful mall are. The over­all vacancy rate to­day stands high at about 20% in re­tail malls across ma­jor In­dian ci­ties, while Su­pe­rior Grade malls have vacancy rates av­er­ag­ing at only 10%. Given that in­ter­na­tional re­tail­ers will pre­fer to take up space in th­ese malls, the short­age of qual­ity space is ev­i­dent and will be felt for some time.

Op­por­tu­nity For Dis­counted As­set Pur­chases

For REITs to pro­vide at­trac­tive yields, they have to pur­chase as­sets at a rea­son­able price, which then fetch at­trac­tive rents. This is par­tic­u­larly im­por­tant for re­tail – an as­set type that is per­ceived as riskier due to the lower pre­dictabil­ity of in­come. While up­com­ing Su­pe­rior Grade malls will of­fer lu­cra­tive in­vest­ment op­por­tu­ni­ties, some of the ex­ist­ing stock of lower-grade malls could be up for sale at a dis­count. For in­stance, of Mumbai’s 65 ex­ist­ing malls, only 20 are of a size suit­able for se­cu­ri­ti­sa­tion in a REIT. Of th­ese, five or six could be con­sid­ered dis­tressed as­sets. Th­ese low-grade malls are un­der per­form­ing due to poor de­sign el­e­ments and the fi­nan­cial dis­tress of their de­vel­op­ers. Other fac­tors such as lo­ca­tion, catch­ment area and re­tail­ers’ in­ter­est are favourable in many cases. While REITs will not want to con­sider malls that are strata sold (another ma­jor cause of mall un­der per­for­mance), malls that have ev­ery­thing other than de­sign and fi­nance go­ing for them will be very at­trac­tive ac­qui­si­tions.

Strength­en­ing De­mand

Re­cent data made avail­able by hir­ing firms (recruitments), au­to­mo­bile as­so­ci­a­tions ( car sales) and the cen­tral bank (home loan dis­bur­sals and re­duc­ing in­fla­tion) sug­gest that con­sumer sen­ti­ment has been on the rise in the past few months. This is good news for or­gan­ised re­tail, and in­di­cates a rise in con­sumer spend­ing go­ing for­ward.

Mall Man­age­ment

When com­pared to the man­age- ment of com­mer­cial build­ings (which share common fa­cil­i­ties and have rel­a­tively sta­ble ten­ancy pro­files), the man­age­ment of re­tail malls is com­plex. Apart from cater­ing to var­i­ous brand cat­e­gories, mall man­age­ment also in­volves plan­ning the right ten­ant mix, space op­ti­mi­sa­tion and zon­ing, and con­stant adap­ta­tion to con­sumers’ shop­ping be­hav­iour.

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