Realty: Retail segment not a lucrative avenue

Published: August 24, 2009
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When the going was good in the real estate sector a few years back, retail was seen as a lucrative avenue to park one’s funds. But given that the current scenario creates scepticism on the return on investment, is retail still seen as a profitable option?

Take the case of businessman Manoj Shah who had invested in a mall in 2008. However, the slowdown in the market made this investment yield low returns over the next few months. Shah then decided to exit the retail project and to invest his money elsewhere for better returns.

Manish Aggarwal, executive director, investment services, of global real estate consultancy Cushman & Wakefield (C&W) India says it is advisable to stay clear of pre-launch or pre-lease projects at this time. “At present, investment in retail real estate is not the most coveted of investment options owing to reduced retail activity. This is primarily due to falling consumer confidence and unrealistic rentals affecting bottomlines,” he says.

Needless to say, the global financial meltdown and the slowdown in the Indian economy have adversely impacted India’s retail sector. “The resulting drop in yield coupled with low leasing activity and high vacancy rates have all led to individual investors staying away from any new retail real estate investments. Additionally, many first-time mall developers who were earlier planning mall developments on sales model (i.e. selling retail space to investors rather than leasing it directly to brands) have now either postponed or cancelled their projects. This has further limited opportunities,” asserts Mr Aggarwal.

Developers have a similar take. The retail segment is not particularly considered ideal right now as people are being cautious, feels Manu Goswami, head, business development and strategic planning, Jaypee Greens. Goswami, however, adds that the smart investor is cherry picking and continues to check for inventory that can bring them attractive capital gains later.

Agrees Jeeves Talwar, group executive director, DLF. He says the retail segment will take off only when the economy starts registering growth. “Builders have been slow in investing money in retail projects…retail spending has also been hit. When the segment starts improving, investments will improve too.”

If one does want to invest at this time, choosing the right locations is very important for the investor. When you are considering retail, you can invest either in a mall format development or in a high street standalone store format. Chintan Patel, associate director, real estate practice, Ernst & Young, suggests a few key things to consider.

“It is important to consider factors such as presence of prominent anchor/large tenants, tenant mix, location/frontage of the mall vis-à-vis any major road, ease of approach and catchment catered while investing in a mall as they can have a significant impact on the rentals. But if you are looking at the high street format, it is imperative to select a prominent ‘address’ for your store, i.e it should feature in leading shopping corridors of the city.”

According to C&W, an investor should evaluate opportunities in established retail destinations such as Linking Road and Colaba in Mumbai, Brigade Road and Commercial Street in Bangalore, Khan Market and South Extension in New Delhi, Banjara Hills and Jubilee Hills in Hyderabad and CG Road in Ahmedabad. But opportunities here too may be limited.

“Most owners have made significant gains through leasing of their retail space over the years and are likely to hold on to their investments till demand picks up. In the event of investors exiting from established mall spaces with assured returns, there is an opportunity to invest in malls such as The Forum in Bangalore, the InOrbit Mall, Malad in Mumbai or the MGF Metropolitan/DLF City Centre in Gurgaon. It might be less risky to invest in malls at good locations with typically low vacancy levels,” adds Aggarwal of C&W.

But not all feel that retail is moving slow at this time. Rohit Malhotra, CEO, Realtech, feels individual investors are still looking at retail developments and especially at rented properties as these give them an immediate return on investment.

But he says that one must study the options carefully. “In case the properties are in prime areas it is better for the investor to weigh his options carefully as prices of the property in the medium term will appreciate. The return on investment has to be the main consideration in case he moves his investment to another portfolio.”

Similarly, Vijay Jindal, CMD, SVP Group, claims to have received good response for its Opulent Mall in Ghaziabad from investors. “This is the time when you can cut lucrative deals. Many developers are coming up with attractive offers. It is profitable as long as you have a long-term vision in mind. It is not meant for the short-term investor.”

Whether you decide to invest in retail real estate right now or not, be sure to understand the appreciation potential that the location has to offer. Decide which retail format you would be more interested in and then make a choice. You may just strike a good deal in these tough times.

Source: Economic Times


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