The introduction of FDI in multi-brand retail will lead to increased demand, which in turn will catalyze more investment opportunities in organized retail. A key differentiator of the retail sector is that it penetrates beyond the top seven cities, into areas where there is a significant shortage of well-planned, well-developed and professionally managed shopping centres. In other words, the organized retail real estate market will spread more uniformly and more lucratively for all concerned.
The increased demand brought about by the opening up of new business avenues by increased FDI in Indian retail will lead to higher commitment to and absorption of shopping centre space. It can reasonably be expected that this increase will be to the tune of 10-15% in the first year and upto 35% by the third year. Because of FDI in multi-brand retail, the organized retail sector in India will increasingly catch the attention of real estate development companies and investors, including private equity firms and fund managers who have so far been very cautious about the retail space.
Geographic Impact
The spread of organized retail’s geographic footprint is a factor demographics that retailers, depending on their product categories as well as short term and long term business objectives, will target. Hypermarkets such as Wal-Mart, Tesco and Big Bazaar will absorb the highest amount of retail real estate in Tier II and Tier III cities.
Among these, they will focus on the top 35 cities – those with populations bases of one million or more – in the first and second phases. Though the spread will happen in all region, it will take place in clusters rather than in the form of carpet-bombing, since available of retail logistics and infrastructure play a significant role.
Impact On The Cost Of Retail Real Estate
The main ingredient of real estate costs is land, which continues to remain stable and in fact is appreciating in most markets. This needs to be coupled with the cost of construction and cost of capital. There is also a challenge by alternative and much more lucrative investment opportunities in the form of residential projects. supported by stronger-than-expected demand for retail brought on by the opening up of FDI norms, this may actually accelerate land prices and the cost of space in shopping centres.
This will not happen immediately upon introduction of FDI in multi-brand retail. The reason is that there are a lot of non-performing retail assets on the market that will be absorbed in the first phase. By phase 2 of the growth cycle, which will come around by 2013, valuations are likely to move up by at least 30%.
The author, Sanjay Dutt is CEO – Business, Jones Lang LaSalle India
