India needs to develop and offer more quality retail spaces at commercially viable costs: John Strachan

Interview with partner & global head of retail, Cushman & Wakefield

The US-based global management consulting firm, A T Kearney, in its Global Retail Development Index 2011, has ranked India as the fourth most attractive nation for retail investment, among 30 emerging markets. The rapid expansion of India’s retail industry also means there is great demand for real estate. Analysts say international hypermarket chains like Walmart, Tesco and Carrefour — apart from national chains such as Big Bazaar and More — will absorb a large chunk of retail real estate in tier II and tier III cities. In this interview to Saumya Prakash, John Strachan, partner & global head of retail, Cushman & Wakefield, address some of the industry’s most pressing issues.

What is your assessment of thee Indian real estate market? What are the challenges before the industry in general?
I will begin by saying that against the backdrop of uncertainty, the various real estate segments in the country have shown a great degree of resilience. The commercial office space sector witnessed substantially high absorption levels. The retail sector too, despite high inflationary conditions in the economy, witnessed quite a few major retailers, both national and international, expanding their operations. Mall supply, which remained subdued during 2010, saw major improvement with most cities witnessing big projects becoming operational. In the residential sector, while the developers initiated new projects, buyers demonstrated cautiousness in purchase decisions, thereby restraining major price escalations in the segment.

Though 2011 began on a positive note for the Indian real estate market, the cautiousness on the part of consumers in the second half was dictated to a large extent by the uncertainty in the global markets, the domestic inflationary pressures, the rising home loan rates and the high price points across large sections of the residential market. The year witnessed several landmark initiatives by the government with the introduction of the Land Acquisition Reforms and Rehabilitation Bill, the Real Estate Regulatory Bill, 100 per cent foreign direct investment (FDI) in single brand retail and the new development norms introduced by some states. Although many of the bills are yet to be enacted, it is important to note that these are the first steps towards institutionalising the sector.

What has been the impact of allowing 100 per cent foreign direct investment (FDI) in single-brand retail on the real estate business in India?
The announcement of 100 per cent FDI in single-brand retail will have limited impact on the real estate business in India in the short term. Given the complexities of starting a business in India, it will take some time for new international retailers to start operations and add to the existing demand for retail spaces. However, there will still be positive sentiment within the real estate industry and this, along with an increase in actual demand, will create an upward pressure on rentals in quality high street retail spaces and malls. Consequently, the vacancy levels will also reduce. The long-term impact will be that the retail real estate market will mature and India will witness quality retail spaces emerge on high street locations as is the case in developed and other developing markets.

With the opening of FDI, the market will see more corporate backed convenient large format players entering the market. With the market becoming more competitive, the end consumer will gain in terms of getting better quality and pricing. This will impact the retail real estate markets across all the major cities by transforming the quality of retail space supply — be it with respect to design, concept and investment in retail developments.

How does India compare in this respect with some of its neighbouring countries in the region?
Until recently, global retailers were mainly looking at starting or expanding their operations in China and Brazil among the fast growing economies. India has always been on the watch list of retailers from developed countries with few actually taking the risks of entering and expanding their operations. Now with 100 per cent FDI being allowed in single-brand retail, hopefully, those waiting to enter this market will get enough incentive to do so.

Quite a few international retailers like Target or Tesco have already outsourced their customer care centre to India and are closely studying the market to set in place their own operations here. Metro AG, Carrefour and Walmart have been expanding their cash and carry format. Starbucks too has joined in with Tata Global Beverage, setting up a 50:50 joint venture to tap the beverages market.

Can you specifically talk about the options before international players against this backdrop?
Hundred per cent FDI in single brand retail has given a choice to many international retailers to own their businesses in India. The options available to them prior to this were joint ventures (JV), franchisee and licensing agreements. International retailers who were comfortable exercising any of these options have already set up their operations in India. However, many, fearing brand or business process dilution, were not comfortable with these options. Such brands can now look at entering India.

However, one must not assume that the floodgates to international retailers are now open. An important part of the FDI norm is the rider of 30 per cent mandatory sourcing from local small and medium enterprises (SME) which may still compel retailers to come in via a joint venture, licensing or franchising route.

What kind of impact will all this have on the overall economy of India?
Any immediate impact of the policy of 100 per cent FDI in single brand retail on the country’s economy can be ruled out as it takes 18-24 months for most retailers to complete their market entry process and start operations. The benefits will accrue over a period of time specially lending itself to the growth and operations of the SME sector in India.

The Indian government has ensured that the domestic manufacturing units are not compromised and so the policy provides for a rider of 30 per cent mandatory sourcing of requirements by the foreign retailers from local small scale units, which will eventually help the units in the SME sector to increase their operational efficiencies by employing the latest technology in production processes. It will also eventually lead to more income generation, employment opportunities and increased investment in the sector. Moreover, it may also ultimately help the sector to become bigger and more organised to be able to undertake large scale operations. On the whole, the real impact will be witnessed in the form of accelerated domestic production in the medium to long term.

What sort of infrastructure and business procedures do we need to attract more international retailers to the Indian market?
In terms of infrastructure required to attract more international retailers to the Indian market, India would need to develop and provide more quality retail spaces at commercially viable costs not only in the form of malls/shopping centres, but also in key high streets. Besides looking at factors such as building quality, availability of space, better amenities and facilities among others, international retailers would prefer to lease/occupy high street properties that have clear titles and are easy to transact.

What are the more noticeable trends in the retail real estate sector globally? Are there any new models/arrangements and mall formats that we can expect to see in India?
Internationally, various locations are at different stages of retail growth. Most nations in North America, Europe and South-East Asia and Asia Pacific have reached a certain level of maturity in retailing where they have focused/defined shopping centres and high streets. Customer convenience is playing a key role in retail market development with separate shopping centres/high streets for luxury products and specialty retail centres within the city and outlet centres in the outskirts of the city. This provides the shopper the convenience of a wide choice of options in the same vicinity.

Revenue share with minimum guarantees is an international practice for leasing in malls/shopping centres as it embodies a spirit of partnership between the retailer and the developer.

Where is the retail sector in India headed? What are the areas that need to be focused on?
India is a very high potential retail market and many global retailers are interested in entering and expanding within this market. There is a certain enigma about it besides the socio-political diversity and the traditional peculiarities. The important aspect is that currently organised retail in India is only about 6 per cent of the total Indian retail market worth approximately $26 billion. Given India’s economic and demographic strengths, this will keep growing — first in tier 1 cities and then tier 2 and 3. Organised retail in India is expected to grow to $84 billion by 2016 at a CAGR of 26 per cent. As the sector grows, India will see more organised retail real estate supply as more international retail stores open up and expand.

A major focus area for the retail sector will be improving the quality of retail spaces, both malls and high streets in tier 1, 2 and 3 cities. For the sector in general, the focus will be on widening the role of organised retail in the Indian economy. This will require investments in the back-end and supply chain operations entailing significant transformation in the operational formats and advancement in the logistics and support infrastructure. Simultaneously, as the retail market matures with further category segmentation, the need for retail research and analytics to provide enhanced consumer insights will also grow.