Pan India mall developers can be game changers for PE funds
An increase in investors’ appetite for shopping malls is a result of growing urbanisation and a rise in disposable incomes, particularly in India and China, according to recent media reports. Shubhranshu Pani, MD, Retail Services, JLL India and Susil S Dungarwal, Chief Mall Mechanic, Beyond Squarefeet, share their thoughts on what is leading to the PE surge in India, the drawbacks on the developers’ side and how malls can become a preferred choice for PE investments.
When compared to their global counterparts, Indian malls have a long way to go. India is yet to attract PE investment the way malls in other countries do – especially in mature economies. The country does not yet have enough developers who want to pursue pan-India mall construction and management. So, PE Funds are also limited to city specific developers for investment, and not all funds want to do that owing to bandwidth issues, says Shubhranshu Pani, MD – Retail Services, JLL India.
According to a recent JLL India report, Indian retail sector has attracted a total of INR 5,500 crores (cr) between 2015 – Q1 2018. Close to INR 1000 cr have been invested in the sector in Q1 2018, making it one of the best quarters in recent times. Prominent PE deals include GIC in Viviana, Blackstone in L&T Seawoods Grand Central, Phoenix Mills Ltd. getting entity level investment for retail development, Blackstone buying Nitesh Estate’s mall in Pune, and Xander Group investing in Malls.
Pani points out that Indian malls are already making serious efforts to catch up with their global counterparts in terms of customer experience. However, it is quite unlikely that all new malls will be of global standard and deliver excellent customer experience; even in mature economies not all malls meet all the expectations. The process and innovation must continue, as is the case in Western countries – where malls were born. With foreign equity and expertise having a higher stake in Indian malls, this process will be faster going forward. Indian developers have also gained experience, and that helps.
Talking about the latest trends in mall development, Susil S Dungarwal, Chief Mall Mechanic, Beyond Squarefeet, feels that after a little lull in the last few years, mall development is now catching up and more malls are being planned across the country. “The estimation is that in the next 3-4 years, we will see over 200 malls coming up across the country. While a very few are coming up in metros, most of them are being developed in Tier II & Tier III towns/cities,” he adds.
Reasons for PE surge in Indian malls
After taking a backseat for a few years, the PE investors are out again on a shopping spree for mall spaces in the country. Some of the leading global private equity and sovereign funds, including Blackstone Group, Canada Pension Plan Investment Board (CPPIB), APG Asset Management, Xander Group and GIC are hunting for the ideal investment bets in India.
Some of the major transactions in the retail real estate sector happened between January and March 2018. This period saw The Phoenix Mills and Canada Pension Plan investment Board splurging INR 650 crore in Bengaluru on a land parcel and Blackstone’s INR 300 crore deal for a majority stake in Nitesh Mall, Pune. Recent media reports also indicated that Blackstone raised $9.4 billion for real estate investments in Asia and PE funds. A boost in the investors’ appetite for shopping malls is a result of growing urbanisation and a rise in disposable incomes, particularly in India and China. Blackstone’s retail assets portfolio includes Elante Mall in Chandigarh, Seawoods Grand Central Mall in Navi Mumbai and two assets each in Pune and Indore. It also acquired two malls in Amritsar and Ahmedabad from Alpha G Corp In November 2015, according to recent media reports in a leading daily.
Private equity investors have shown confidence in the future trends of Indian retail real estate and have started to make large value as well as long-term commitments towards the sector. The key criteria for choosing a property for investment have been the rental values, vacancy levels, tenant mix, design and quality of mall management, location and ownership, says Pani.
To be attractive enough for the PE investment, malls need a strong & sustainable bottom line, with no gaps in regular revenues, says Dungarwal. He feels that the malls can attract PE investment through specific marketing initiatives such as road shows and case studies.
Considering professional mall management as the key ingredient to attract PE investments, Dungarwal emphasises that mall management plays a crucial role for any PE investment, as the investor needs to be assured that the asset is being managed to the best possible standards and SOPs. The PE fraternity surely looks at the mall management skills of the mall developers/ owners, as they are more interested in making money than in getting into operations.
To become the preferred choice of PE investors, Indian malls should score well in three basic areas – transparency, accountability, and being process driven. PE investors prefer malls that are professionally managed and consistently monitored. The data analysis of the mall must be used to derive the strategies for operating the mall, says Dungarwal.
Talking about the PE influx in the retail real estate market and its impact on the industry, he further adds that the recent influx of PE has risen sharply in the shopping mall industry and should continue for about a decade. Retail assets are the most sought-after investments by most PE players, as malls offer the highest ROI across the real estate sector.
Mall marketing and PE investment
Commenting on mall marketing with respect to PE investment, Dungarwal feels that mall marketing is a key to creating the required brand image of the mall, which is mostly done through B2C marketing. The PE players may consider the mall’s B2C brand image, but then the mall must be marketed in a very different manner to attract investment. On the marketing spend (B2C), the average is about 5 per cent of the revenue of the mall for first three years, he confirms.
Product, catchment and customer experience are the deciding factors
JLL India estimates that the future pipeline of five years (2018 – 22) will have 90 malls spread over 34 million square feet (mn sq ft). Of the expected new malls, 62 per cent will be in the category of superior malls while only 10 per cent will remain in the poor category. About 28 per cent malls in the next five years will be considered average. Most existing malls will become aligned to these categories by going into redevelopment, redesigning or changing their tenant mix. Certain properties may also choose to opt out of the business, putting the real estate to alternative use. The steady increase in interest from private equity investment companies has propelled developers of retail malls to re-evaluate their portfolio to include 3 determining factors – Product, Catchment and Customer experience, which, going forward, would be the core of creating a successful retail space.
Pani describes a superior mall as one having single ownership with a retail-conducive architectural design and space efficiency. The mall should have distinct visibility and good circulation flow for all its tenants, an optimum and complementary tenant mix, and a balance between anchor stores and line stores. It should also have optimum common area maintenance charges, adequate infrastructure, efficient mall management and a strong catchment area. Having the flexibility to respond to the changing behaviour patterns of shoppers, an ability to offer novelty and a differentiated shopping experience are some other features of a superior mall.
Mall profitability in an era of digital commerce
When asked about what strategies malls can adopt to give their visitors an online experience in the offline world, Pani mentions, “Today, it’s all about what the customer wants. The retail space is no longer a competition between offline and online, but a race to appeal to the consumers’ desires. If you are a retail brand and you want to build loyal customers, you need to build a shopping experience that seamlessly moves between offline and online. The customer should enjoy your services to the point that they feel that they are not just shopping but having an overall retail experience. Hence, retailers are preferring to open stores across malls as well as high streets.”
Pani is quite optimistic about the retail real estate industry, he adds, “Though e-commerce has fundamentally altered the way we shop, it doesn’t imply that the need for physical space has lessened. If anything, it’s become more important. As brands race to deliver products to the consumer in the shortest amount of time, they will turn to their most valuable asset – real estate. Physical stores will soon act as pick-up points with added sell-through opportunities. Retailers and real estate owners should start to leverage their physical assets to gain advantage in the omnichannel landscape.”
To remain profitable in an era of digital commerce, mall developers/ owners will have to invest heavily in upgrading their offerings to “app-customers” by continually incorporating the latest technologies into their services to create an advanced shopping convenience for the customers, suggests Dungarwal.
He further adds that there is no single formula to make any mall successful. A successful mall is a combination of many strategies. However, one key element, which should never be given a miss, is primary market research for the mall’s feasibility. Unfortunately, most mall developers skip this. But, it is essential to ensure that all aspects of the mall development are aligned with the market research.
Tier II & III are the next retail destinations
Pani says that the retail story in Tier II and III cities is very strong. The demand for brands and spending capacity of the residents of these locations have seen a surge in the past few years. Tier II and III cities such as Lucknow, Jaipur, Chandigarh, Kochi, Patna, and Bhubaneshwar, among others, are the next retail destinations in the country owing to increasing rents in Tier I and metro cities. Also, he points out that the retail sector in Tier II and III cities has witnessed an investment of USD 6,192 million between 2006 and 2017 as against USD 1,295 million for Tier I metro cities during the same period.
What lies ahead for the retail real estate industry?
Pani states that retail supply in the next three years (2018 – 2020) is expected to be at 19.4 million square feet (msf). In the same period, demand will be approximately 15 msf. A JLL study reveals that 2018 will see the highest figure for supply since 2011.
The steady growth of supply will be accompanied by an equally stable growth in demand, which is also expected to be at around 15 msf in the period of 2018 – 2020. “Further, we expect a parallel rationalisation of existing mall spaces which will help the market avoid an oversupply situation. As a natural course of events, we can expect a few malls to close down or temporarily suspend their operations for repairs, renovation and upgrades. This will help the market create the necessary balance to maintain the rental values,” he says.
According to JLL India, the cumulative mall stock in years is as follows:
As PE investors eye the Tier II and III markets, it is time for Indian retail real estate developers to gear up and stand out in the crowd by establishing superior malls. Having said that, the ball now lies in the court of the Indian mall developers to grow pan India and reap the PE benefits.