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Not Much in Store

India's retail sector is poised to get big money with the government allowing foreign direct investment (FDI) in multi-brand retailing. Some upbeat developers have already started marketing their mall properties. While there is no doubt that the demand for mall space will rise when foreign players enter the market, does it make sense for a small investor to buy a shop in a mall?

India's retail industry is worth more than Rs 20 lakh crore, according to the Confederation of Indian Industry. Consultancy firm AT Kearney expects it to grow at 15-20% per annum. Global retail giants are busy planning their India entry.

"An influx of new retailers will increase the demand for investment-grade retail space and the bargaining power of developers, which will reflect in higher rentals and capital values. Vacancy levels, too, will fall," says Anuj Nangpal, director, investment advisory, DTZ India, a real estate consultancy.

The changes in rules for the retail sector are likely to bring in $3 billion (around Rs 16,000 crore) over the next five years, says Crisil, a research firm. However, most do not expect any immediate impact.

"Foreign investment in retail is a process rather than an immediate response. It will take two-three years to see the result," says Jonathan Yach, chief executive officer, Propcare Mall Management, owned by Bangalore-based Mantri Developers.

Foreign superstores would enter the market only in 18-24 months, probably on a trial run for a year or so. Considering the usual growth cycle of big retailers, developers would like to have fresh stock ready when foreign players expand. Developers are already said to be in talks with foreign retailers to make them anchor-tenants in their malls.

India's mall segment is already under stress due to overcapacity. The mall retail space in India's top eight cities was 64.7 million sq ft in September 2012, more than 70% of which was added in the last five years. Around 28 million sq ft retail space is expected to be added in five years. Despite the high vacancy level (18%) in the malls, the Delhi-National Capital Region would have an additional 10 million sq ft space by 2016, according to property consultant Cushman & Wakefield India.

Developers, so as not to repeat their mistakes, are now focusing on building high-quality malls and adopting new rental models to improve occupancy and footfalls.

Also, sale of shops to individuals is not preferred as developers see more value in malls owned and managed by one entity. So, options for direct purchase of space are limited for retail investors.

Even in cases where developers are selling shops to individuals, it is a risky investment as such malls usually tend to be poorly managed due to owners' sole focus on rentals.

Earlier, real estate private equity funds accepted even investments of a few lakhs, but new norms mandate a minimum ticket size of Rs 1 crore. This makes such funds out of reach of small investors.

A good investment vehicle is real estate investment trusts (Reits), which are like mutual funds investing in properties. "However, India does not allow Reits. It should happen in one-two years," says Yach.

Once the government allows Reits to operate in the country, retail investors will get access to the real estate market without the hassle of acquiring and managing properties.

Investors with the means to own mall spaces need to be selective about locations if they are looking to gain from the FDI push. Along with population requirements, state governments have been given the discretion to take the final call on the entry of foreign retailers.

"Nine states have supported the decision, whereas six have reservations. Given the requirement of state-wise approvals, foreign retailers are expected to be cautious about entering India," says Nangpal.

How about investing in an underperforming mall? Yach of Propcare says no, as valuation and rentals depend on the mall's location, design and management. Poorly designed malls will require re-modelling or complete reconstruction. While mall management can be improved, bad location will keep buyers away, he says.