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Great homes, great malls coming!
Sangeeta Singh |
March 21, 2005
Vivek and Aru Srivastava, residents of Celebrity Homes in the NCR's Palam Vihar, can't understand what the fuss in foreign direct investment in retail and real estate is about.
They're happy about the ambience they live in -- complete with club house, gym and swimming pool -- and the malls are within close driving distance. How will foreign companies improve the quality of their life any further?
It's a question traders from Delhi's Karol Bagh to Mumbai's Crawford Market, and property dealers in Delhi's Paharganj to Mumbai's Kandivli are also asking, not without some trepidation.
For large-scale realtors and retail investors could upset their apple carts, which are often no more than mom-and-pop, hole-in-the-wall outlets.
When the retail boom overtakes India, especially in food, grocery and clothing, and residential and commercial complexes evolve along modern, clean formats, will it spell the end of the local kirana shop, the helpful (but oily) neighbourhood property dealer? Will India then take its place among the emerging markets of Singapore, Malaysia, Thailand and China?
With foreign direct investment, the answer is probably yes. "To view the difference that FDI in retail and real estate can make, evaluate the quality of construction of houses, offices and malls in Singapore, Malaysia and China," says Vivek Mehra, executive director, PricewaterhouseCoopers.
It's a far cry from what passes for development in Indian cities: illegal construction, encroachment, poor approach roads, and filth.
Yet the government was mum over allowing FDI in real estate and retail, two sectors that contribute to the quality of life, that is until last month, when it gave an in-principle clearance in the case of real estate, and the ministry of commerce & industry issued guidelines under the automatic route for FDI in construction.
For the Indian consumer, the entry of foreign companies into these sectors involves three pivotal changes --modern technology, transparency in dealings, and the best practices.
Vivek Mehra suggests that even if one in a hundred builders is a global player, high benchmarks will be established among the Indian players, and these changes could take place as early as within 12-18 months.
Arvind Singhal, chairman, KSA Technopak, takes a similar view about retail.
The Srivastavas lucked in with their Celebrity Homes at a time when real estate in India was booming. Or take Ajay and Priya Jain, residents of Laburnum apartments in Gurgaon where, like the Srivastavas, they take their facilities and maintenance for granted.
But the Jains and the Srivastavas are among the lucky few who got what they were promised by their builders, without the cluster of shanties and piles of garbage that surround most real estate ventures in Mumbai, Delhi, Bangalore, Chennai and Kolkata.
However, with the government opening the real estate sector to foreign developers, some, like Anuj and Vanita Gupta have postponed their decision to buy a home till the foreign players actually come to India.
"We expect a quality house at a decent price and want to see zero discrepancy between what is shown as the built-up area by our builder and what we actually get," says Vanita.
Does that suggest that domestic developers have fudged their promises? "Well, not everything is in our hands," says the official spokesperson of DLF Universal, Vijay Vancheswar.
"Every builder pays the state government external development charges, but this money is not being ploughed back. The result is poor approach roads and garbage and filth surrounding good buildings."
Foreign partners, on the other hand, will be able to pressure government departments to beautify surroundings. "Streaks of this can be seen in Bangalore, Hyderabad and Chennai, where foreign investment has set in," says Anshuman Magazine, managing director of multinational property consulting firm CB Richard Ellis.
Does the same optimism prevail in the retail sector as well? Shikha Duggal, a Delhi-based entrepreneur and a frequent traveller, laments the state of Indian malls.
"You have such a wide variety of products to choose from at Walmart in the US. I feel Crossroads and Shoppers' Stop are nowhere close to them," says Duggal.
She has the support of Gurgaon's K Subramanian, a gizmo freak. "When I have to shop for jeans, visiting a mall makes sense because I can try several brands together, but what choice do I have when I want a PDA,a mobile handset, or even books?" he asks.
"Hold on," says KSA Technopak's Singhal, who claims that data across countries shows that the introduction of modern retail formats helps reduce prices by at least 10 per cent, particularly for food and groceries.
"FDI in retail will ensure a wider assortment of high quality products and services, but at lower prices." Analysts also suggest these formats will build efficient supply chains and eliminate intermediaries.
"The classic example of this is onions, which have a farmgate price of Rs 3/kg but are sold at Rs 10-12/kg in the market," says Asitava Sen, principal consultant, PwC.
It can be a win-win situation for farmers as well. With Pepsi and McDonalds' backward integration, we get the best quality tomotoes, potatoes, lettuce, babycorn and gherkins in our kitchens today.
What more? Consumers can be assured products with better shelf lives, weights and probably low or no contamination. "If we followed modern best practices, India could have been saved the recent embarrassment caused by the rejection of its chilli powder in the UK," says Singhal.
However, changes cannot -- and will not -- happen overnight. "Foreign players have no magic wand. They will simply create competition that will force others to improve, as happened in the automotive and telecom industries," says Magazine.
But he agrees that property prices will bottom-out. Vancheswar also feels that prices will become competitive. "I only hope domestic players don't have to take a major hit," he cautions.
In retail as well, B S Nagesh, managing director and chief executive officer, Shoppers' Stop, doesn't foresee overnight changes -- certainly not for the first 18-24 months of foreign players entering here.
Prices of consumer electronics could beat inflation and segments like garments may even experience prices coming down.
If Indian retail chains like Shoppers' Stop and Big Bazaar could not cannibalise the mom-and-pop stores, what harm can the foreign players do?
B S Nagesh, Shoppers' Stop
Indian retail malls are a big sham. There is nothing besides food and clothes.
K Subramanian, NCR resident
Thanks to Pepsi, farmers in Punjab are supplying the best quality tomatoes, as a result of which consumers have benefitted.
Arvind Singhal, KSA Technopac
I am quite clear the consumer must be king. Unfortunately, the government looks at FDI only from the trader and industry points of view.
Vivek Mehra, PricewaterhouseCoopers
Child labour will go and women will find employment, especially in packaging and tailoring.
Astitava Sen, consultant
Another area where consumers feel improvements will occur is with regard to transparency in the real estate business. With builders concerned only with profits, they take the money first and don't bother about infrastructure.
Mehra feels foreign companies will build first, demonstrate that their property is worth buying, and probably command a premium in the next project.
However, what happens to maintenance? Laburnum, for instance, said goodbye to CB Richard Ellis, which was maintaining it, and started its own welfare association.
The reason? It was proving expensive. "If foreign players maintain your property, they will charge for their pound of flesh," says Srivastava. Agrees Jain, "There are no free lunches in this business, but who minds if one is getting good service."
Do these developments suggest the displacement of maintenance and security teams in construction, and will the introduction of Walmart, Selfridges, Carrefour, Tesco or Sainsburys in India mean the closing of mom-and-pop shops? Not quite, if you were believe Nagesh.
"Unless organised retail becomes 18-20 per cent of the total market, nothing will happen to your neighbourhood retail shop, especially when catchments are shrinking and their home-delivery service is just a phonecall away."
A survey by KSA Technopak in Chennai -- which has 20 per cent organised retail -- suggests that the entry of Food World and Subiksha did not lead to the closure of any neighbourhood store.
"Since their fixed cost is abysmally low, they will have to lose 54 per cent of their business in order to exit," says Sen.
But is a big international brand enough to cheer Indian customers?
Not quite. Take Marks & Spencer. "In England, it is a practical departmental store for the middle-income group. Here, I enter the store only when there is a 50 per cent sale," says Binu Mehta, an NRI.
Sen of PwC says most multinationals who have entered India through the franchisee or licensing arrangements are forced to operate at sub-optimal level.
That explains the high cost, as they cannot source out of India. But then, even Shoppers' Stop is perceived to be expensive. Analysts suggest that this too is an example of sub-optimal scale.
Krish Iyer, director and CEO, Crossroads, argues that scales will be created with the entry of foreign players. "Over 40 per cent of our agricultural produce goes waste because of poor warehousing. I believe the entry of foreign retailers will help grow the scale substantially in the short term, encouraging entrepreneurs to invest in cold chains and warehousing," he says.
Another good thing is that these modern formats are expected to create employment.
Sen says considerable surrogate employment will be added in terms of cleaners for toilets, people for packaging, security guards and so on, with quality employment in terms of weekly offs, eight-hour shifts and the like.
"Ninety five per cent of Shoppers' Stop employees are first-timers, English-speaking and computer literate, and one would expect the trend to grow," says Sen.
Not just that, India could also act as the outsourcing hub for IT expertise in retail. That probably explains why Tesco, Debenhams and Dairy Farm are studying the Indian market -- Tesco, in fact, has set up a BPO operation in Bangalore, and Dairy Farm has tied-up with RPG's Food World.
But will the foreign players come to India? The general belief is that international retailers look at two things -- relevant population and quality income.
On both counts India and China are the two most promising economies in the world, and Iyer of Crossroads says that with India still to catch up with China in attracting foreign capital, there is ample scope. Finally, therefore, customers can rest easy as someone else tidies up for them, instead of getting by on obsolete models of quality living in the metros.
FDI opportunities in real estate
The ministry of commerce & industry has issued guidelines under the automatic route in townships, housing, built-up infrastructure and construction projects.
Market size of Rs 600 billion with an annual growth of 30 per cent.
FDI will create benchmarks and eliminate discrepancies in terms of super built-up carpet areas.
In the short term, it is possible that real estate prices may shoot up. Over a period of time, they are expected to stabilise at appropriate levels.
FDI will also provide access to low-cost risk capital, which in turn will bring in new approaches and technology for faster execution of projects.
- Unproductive, vacant land will be put to use which will generate significant employment, directly as well as indirectly.