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Sep, 10 2010

SIGNS OF SIGH BEING OVER?

RETAIL spaces across South Asia are alive and kicking with footfalls. This can be gauged from the inauguration and construction of new retail spaces in Singapore, Malaysia, China and India.

RETAIL spaces across South Asia are alive and kicking with footfalls. This can be gauged from the inauguration and construction of new retail spaces in Singapore, Malaysia, China and India.

According to industry analysts, the Singapore real estate market saw the addition of three new malls, Mandarin Gallery, 313@Somerset and TripleOne Somerset, in the fourth quarter of 2009. As a consequence of the completions, Orchard Road, one of Singapore's most popular shopping districts, underwent a major facelift with correctional prices prevailing since the recession.

As per the first quarter reports (2010) by CB Richard Ellis, Asia and Pacific regions are witnessing the strongest growth in comparison to that of Europe and the Americas, which are yet to see the silver lining post recession.

Malls moving from metros to tier II, III cities

Investment is turning around retail spaces across South Asia, which is reviving post slowdown. Malls are back in the business mould, spreading cheers for retailers and developers. Defining the mood, Eugene Tang, Head of Retail, Jones Lang Lasalle, Greater China, explains, “The post-recession period is marked by more investment in China and India. Mature retail brands are moving rapidly to tier II cities of China after success in tier I cities.”

Similarly, post-recession retail scenario in real estate in India has been marked by the arrival and construction of malls in tier II and III cities like that of China.

Explaining this phenomenon, Sushil S. Dungarwal, Chief Mall Mechanic, Beyond Squarefeet Advisory Pvt. Ltd, says, “The recent development of the mall culture shifting to tier II and III cities is because the actual spenders are located here. The consumers here have both the time and money, which propels their power of spending.”

Besides, realty in retail sector in South Asia and India is marked by the mode of expansion of retail spaces. According to industry predictions, certain cities in mainland China, Singapore and India are expecting a large-scale increase in retail floor area, as evident from the number of shopping malls scheduled to come up over the next nine months.

The trend of a stable and healthy owner-tenant relationship across South Asia and the rest of the world is also evolving big time in India. Explaining this emerging phenomenon, Anshuman Magazine, Chairman & MD, CB Richard Ellis, South Asia Pvt. Ltd, states, “Developers have become more understanding of the tenant's needs and are willing to offer more props to ensure higher and sustained occupancy.”

Even though strong growth is being witnessed in the South Asian retail property market, a sense of slow growth in retail sales prevails. Tang predicts that retail sales in areas around Greater China and other emerging markets, like India, will remain slow for sometime.

Rental correction

Retail space rentals are gradually achieving normalcy through correction in South Asia. Similar stances are reigning in retail spaces in India, especially in metros. Reports reveal that rentals in the Delhi NCR region saw a correction with a 10 to 15 per cent drop in rentals.

While the revenue sharing model is preferred amongst mall developers and retailers across both South Asia and India, minimum guarantee model is also picking up in India. Says Dungarwal, “It is an alternative to fixed rentals and is propelling both the developer and retailer to perform. One of the first to follow and introduce the minimum guarantee concept was the Forum Mall in Bengaluru with 12 to 15 retailers.”

Sharing similar views, Chang Yeng Cheong, General Manager, VivoCity Mall, Singapore, states, “Our tenants prefer a combination of both minimum guarantee and the revenue sharing model.”

Govt sops for stability

The real estate segment in South Asia rolled to a substantial stability primarily due to government sops and initiatives to pump up economy through retail spaces. The Ministry of Finance, Singapore, had unveiled a S$20.5-billion (US$13.6 billion) resilience package in the 2009 budget, which is said to help businesses survive the economic downturn. Part of that budget included a 40 per cent property tax rebate to commercial and industrial property owners in Singapore. According to a website report, CapitaLand Ltd, Singapore's largest property developer, was among the first to announce that it would pass down the full amount of the rebate to its tenants. This translates to about S$41.5 million or an average rebate of 4 per cent on net rentals, to all existing tenants in its retail, commercial and industrial developments.

In comparison, the real estate scenario in India continues to remain cold and grim with the Union Budget 2010-11 proposing that all buyers will have to pay 10.3 per cent tax on the purchase of any apartment and/or commercial units. Analysing this situation, Dungarwal states, “Retail is all about the power of enhancing the customer to spend. Unfortunately, the Indian government is yet to take up initiatives for the real estate sector.”

Vertical view on horizontal growth

In regard to property structures in malls, it is the horizontal structure that is preferred by developers, both in South Asia and India. While much have been talked about the success of vertical malls in Singapore, Bangkok and Malaysia, it has been observed that floors above the third level have high vacancy rates and non-retail uses like doctor's offices, making the horizontal structure desirable. Incidentally, the first vertical mall, Orchard Central at Orchard Road in Singapore with 11 storeys, was built in 2008. Analysts in India believe while it is the horizontal structure that is going to be in league, there is a need to educate retailers who still believe that everything should be on the ground floor. With a change in mindset, vertical malls can surely be a roaring success across India.

Success strategies

Several mall developers in South Asia, especially Singapore, have initiated strategies to promote retailers. Far East Organisation had come up with an innovative plan to promote new retailers, launching a Rental Space for Equity Programme (RSEP). In a first for the Singapore retail market, new start-ups can issue redeemable, convertible, cumulative, preference shares (RCCPS) in lieu of their monthly base rent. Far East Organisation's Executive Director of Investment Properties, Eddie Yong, in a press release had stated, “We see the initiative as a proactive partnership by lowering the entry barrier for prospective tenants, who have exciting brands or concepts.”

Far East Organisation will allocate up to 5 per cent of rental space in six of its malls for the RSFE. During this time, the tenants will issue RCCPS in lieu of the monthly base rent, payable up to a cap of 49 per cent of the paid capital or $5,00,000, whichever is lower. Such innovations benefitting both the retailer and the developer are yet to knock at the Indian retail market. So what are the factors that are holding on such unique programmes from entering the India market? “It is the transparency factor that does not prevail in India and innovations like this demand transparency in figures from mall owners and developers,” explains Dungarwal.

India should eye long-term growth

With the mall culture in India evolving through a trial and error phase, warning bells are already sounding over the future of malls in India, courtesy high cost of real estate and low levels of expenditure in Indian households.

Will the real estate in retail be able to sustain this growth or is it just a bubble waiting to burst? Industry experts believe that mall developers need to be more aware and conduct more researches before going over to build a mall. “The most important thing mall developers need to overcome is short-term vision for a mall. They have to take the task of developing a mall more as an asset creation than just a real estate project. They need to understand and believe that malls, like hotels, have a higher gestation period and that they cannot treat malls as they treat any residential or commercial project,” feels Dungarwal.

According to Tony Ward, Mall Mechanic & COO Leasing, Beyond Squarefeet Advisory Pvt. Ltd, “Indian developers need to commit to provide quality buildings, using more advanced building techniques and materials, and meeting their committed timelines. Indian construction companies are the most sought after in the Middle East because they do an excellent job. Why can't they do the same thing here?”

So where do we see the Indian malls moving here from now in comparison to the Asian counterparts? Explains Ward, “Malls will continue to provide a variety of uses for the Indian customer in tier II and III cities, as that customer is at the same stage where the major metros were 10 years ago.” “This could be an aspiration but we have a long way to become a destination,” quips Dungarwal.

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