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| Realtors fall 54% short of retail space target | |
| BS Reporter / New Delhi January 7, 2009, 0:22 IST | |
DLF, Parsvnath and other real estate developers have lagged behind by 54 per cent in their target to open retail space even as retailers’ vacancy climbed to 16 per cent in 2008, according to a study.
Cash-strapped real estate developers failed to deliver 11 million sq ft of retail space in 2008, according to a study released by Cushman & Wakefield. Out of the proposed 74 malls in key eight cities at the beginning of 2008, only 34 were delivered through the year, the study showed. Developers in the National Capital Region (NCR) lagged the most with a supply of 4.7 million sq ft compared with the earlier target of 7.1 million sq ft.
Developers may continue to restrict their supply, or go slow on retail space by a similar amount in 2009 across key major cities, the study showed.
“For any developer, the vacancy level should not cross over 5 per cent. The vacancy level of 16 per cent suggests that most of the malls across India are finding it difficult to manage their operational cost,” said Rajneesh Mahajan, director of retail services at Cushman & Wakefield.
The reason for the shortfall was the mismatch between the potential and actual occupancy. The Indian organised retail sector grew at 25 per cent in 2007. Anticipating the growth of retail sector at above 35 per cent in the coming years, developers had announced big retail projects. However, owing to economic slowdown, the growth of the retail sector has come down to 15 per cent in 2008, resulting in developers deferring their projects for 12-24 months.
“From the projected supply of 20.8 million sq ft space in the first quarter of 2008, we will see a spill over of about ten million sq ft development in 2009-10. Lack of funds leading to construction delays and cautious expansion by retailers have resulted in slow absorption of retail space in malls,” said Mahajan.
Owing to high vacancy rates, rentals for retail space have come down between 20 and 40 per cent and a further cut of 10-15 per cent is expected, according to Mahajan.
“It is noteworthy that the high streets of Colaba Causeway, Linking Road in Mumbai and South Extension and Greater Kailash in Delhi, which had seen a 100-156 per cent rental appreciation in the first quarter of 2008, witnessed rental drops of almost 40 per cent over the last six months,” said Mahajan.
The correction in 2009 would be mainly in non-metros as the ripple effect of the rental correction will reach the tier-II and III cities, said Mahajan.
Interestingly, developers were forced to convert their retail space into office space due to high vacancy. Delhi-based Parsvnath Developers has recently converted one of its metro malls in Shahadra into office space.
As the operational cost of the retailers became unviable due to high rentals and lower sales, they began to work on sustaining business through innovative revenue models and retail formats. “A growing trend has seen the consolidation by large retail players of their multiple retail formats under a single roof,” said Mahanjan. According to Cushman & Wakefield, minimum guarantee and revenue sharing models will make for at least a third of all retail deals in the long term.
According to Mahajan, most of the deferred projects are under construction and the developers will have to face increased cost overruns for completing these projects.
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