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Shopping malls to fuel retail real estate boom
Parvathy Ullatil in Mumbai | August 11, 2003 08:31 IST
Retail real estate will be the next big investment destination with the mall boom hitting the roof, say trade analysts.
Investments in retail real estate, particularly shopping malls, are yielding returns in the region of 12-14.35 per cent as against 6-8 per cent in the residential segment and 11-13 per cent in the office segment.
Though investments in the retail segment have traditionally been more profitable than in the residential or office segments, the absence of enough triple-A rated retailers stopped investors for making a beeline to the segment.
But the entry of a number of foreign retail chains and the success of domestic retailers such as Barista, Westside, and several others has rekindled interest.
Analysts caution that the heralding of retail real estate as the next big investment destination should be preceded by a caveat that high rewards are restricted only to the mall model of investment.
So if you are looking at high-yielding retail investments, then shopping malls with an investment of Rs 25-30 crore (Rs 250-300 million) fits the bill perfectly.
Investments in high street, stand-alone stores where the investor is also the occupier do not offer high returns as the investor is not in the real estate business.
But the high returns are not the only bait for investors, "Though returns on investment in the retail segment are substantially higher than those in the residential segment, the difference is very marginal when it comes to the office segment.
"The only real advantage here is the security of tenure. A retailer who spends a large sum of money to advertise the location of his store will stay put in the same location for at least 7-10 years but the same is not true of a person who runs an office. He has no such considerations and will move out if he finds lower rentals elsewhere," said Arun Puri of Chesterton Meghraj, a real estate consultancy.
K G Krishnamurthy, general manager, HDFC, contends the favourable comparison of investment in the retail real estate as against investment in office complexes, "Investments in retail real estate are more profitable only if the returns are made on percentage of turnover basis and not purely on the rentals. HDFC's investment in the Pune branch of Shoppers Stop yields 12.5-13 per cent returns but our investment in certain office complexes earn us returns of 14-14.5 per cent." said Krishnamurthy.
Some analysts complement Krishnamurthy's views and say that examples of investments in the retail segment yielding returns upwards of 14.5 per cent are few and far between and usually follow the same pattern of a low capital value yielding rentals at the market value.
But Manoj Motta of Knight Frank, real estate consultants, argues that if these examples can be dismissed as exceptions then exceptions seem to be the norm in this business, "The trade is rife with examples of investors acquiring property at a certain value and making a killing on lease rentals. Returns must be studied in a 3-5 year time frame and then the profitability of a retail real estate vis-a-vis a residential or office property will become apparent," said Motta.
Though the mall boom has been triggered by occupiers' desires and is more of an operational issue than an investment issue, investors have been quick to cash in.
The Piramal Group which has been leasing out space at their Crossroads mall in Haji Ali, will change its tactics and sell floor space in their new Nariman Point venture.Trade analysts think that the 20-odd new malls under development in Mumbai will spawn a whole new industry of organised retail real estate.