FDI in Indian multi-brand retail – a medium to long term success

December 12, 2012 / By

Majority of India’s parliament voted to permit FDI in multi-brand retail, which was good news for the country’s retail industry. In fact, as a result of this policy, the sector is going to attract a number of foreign players to invest in the Indian retail market. International products and expertise will enter the country’s domestic market and likely influence India’s overall retail business.

However, the benefits that will come from FDI may not be realised for another two years as any new retail development by a developer to meet the international standard will require at least two-three years and this will be only possible in cities that are permitted to receive FDI. International retailers will require larger spaces and probably choose to be in the sub-urban locations of Mumbai or Delhi, where property prices are relatively low. However, these retailers can afford prime locations in Tier II and Tier III cities. The current average vacancy in malls in major Indian cities ranges between 15-20%, which is because of the high vacancy in low-quality malls, while better malls are operating at almost full occupancy. As such, foreign retailers will likely shy away from those malls that are inadequately designed, poorly managed and located in bad catchments or inferior areas and will look for new malls with better features. Hence, the current vacancy is unlikely to change in near future despite interest from international brands.

Although the opening of FDI has spread some positive vibes among all stakeholders in retail, at least 12-18 months is required for a foreign retailer to complete the entire joint-venture process with an Indian retailer and commence business operations in the country. Also, it could take an additional few months to receive permission at a state level for such a venture. Amid this process of policy change, a slow economy and subdued demand from retailers, the net absorption has continually fallen during the past three quarters of 2012. In addition, developers have been timid, causing the number of completions to reach a record low during the first three quarters of 2012. By end-2012, just 4.5 million sq ft of retail mall space is expected to become operational, a significant drop compared to the historical high of 13.8 million sq ft in 2011. However, with the lack of ready-to-move-in quality mall space in the country’s major cities, good activity has been observed in the retail space on high streets during the past few quarters.

As a few quality malls with high precommitments are already in the advanced stages of their construction and likely to commence operations the next year, 2013 is likely to be a better year for the Indian retail market. It is expected that nearly 9.5 million sq ft of mall space will be added to India’s major cities, such as Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata. There is no doubt that Tier I cities will receive the major share of this new space. Allowing FDI surely will add depth to India’s retail industry both from retailers’ and developers’ sides but the harvesting time is likely to occur over the medium-to-long term, probably in 2H14 and after.

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