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Slowing retail demand hits small developers

Submitted by on Tuesday, 30 September 2008No Comment

MUMBAI: Slowing demand from India’s retailers has thrown plans of smaller developers in disarray, forcing them to look for buyers, industry officials said.

Small builders had hoped to benefit from a half-decade of sharp growth in the retail sector, but dropping rentals, rising vacancies and restricted access to funds is prompting a rethink.

“Many smaller developers are approaching to either sell projects or for joint ventures,” said Pradeep Jain, head of Parsvnath Developers, which has added mall projects in several smaller cities across north India this year.

The real estate industry is struggling with tepid sales as inflated property prices and decade-high interest rates brought an end to the five-year upswing. But, with scores of mall projects underway, demand from retailers is waning.

“The rentals were so unrealistic that no one would make that money in their lifetimes,” said R Subramanian, managing director of discount retailer Subhiksha, who stopped signing properties between December and March because of the high cost of space.

“Total vacancy rate in Mumbai malls stood at 13.1 percent, the highest since 2005,” Jones Lang LaSalle said in a April-June report, adding that vacancy was as high as 30-50 percent in some suburban malls.

Vacancy at Delhi’s prime and suburban markets also rose to 16.2 percent and 10.8 percent in the quarter, it added.

OVER-SUPPLY

Nearly 112 million square feet of retail space was expected to be delivered in 3-4 years, and falling demand from retail means a lot of these projects — sprouting up in smaller cities by first-time developers — are already frozen.

“The oversupply of malls was very apparent, but over estimation of spending power of an average Indian was way off the mark,” Deepak Parekh, head of Housing Development Finance Corp, India’s top mortgage lender said earlier this month.

“Malls are becoming places to hang out or eat, and most retailers with paltry sales are unable to sustain rentals.”

Slowing economic growth and double-digit inflation this year has also forced a tightening of the customer’s purse strings, and sent retailers’ business projections crashing.

“Every rupee employed has to be done smartly, you just can’t waste and get into any unnecessary expenditure,” said Kishore Biyani, head of India’s top retailer Pantaloon Retail.

Last month, Mumbai-based Akruti City said it had cut exposure to retail segment because of oversupply fears and converted seven planned mall projects into commercial space.

The inevitable decline in rentals has begun, said retailers who point to a drop of 10-35 percent in the last six months, especially in the smaller cities.

“Every single rental contract that is falling due for renewal, is being negotiated downwards,” said Pranay Vakil, Chairman at property services firm Knight Frank India Pvt Ltd.

But, large players like Phoenix Mills and Parsvnath see this as opportunity to consolidate in a cashflow-dependent business.

“Shortage of good retail space is still there. A lot more foreign retailers are starting to come in, and they will need large space, which only established players can deliver,” Parsvnath’s Jain said.

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