To date, 2012 has been a challenging year for most of the key sectors of the Indian economy, and the retail real estate sector has not been an exception. The demand in terms of net absorption remained subdued in 1H12 amid careful expansions by retailers. In 1H12, net absorption of retail space fell by 57% from the levels seen in 1H11. The watchful retailers along with the lack of quality malls and the fact that some select quality projects postponed construction caused the sluggish absorption. In the past six months, only 2.3 million sq ft of operational retail space has been added to the market across the top-seven cities of India. On the back of this small supply, the overall vacancy rate declined to 18.8% at end-2Q12, a drop of 140 bps from 4Q11. Because of the uncertain economic climate and weaker business sentiment, developers have been cautious about new launches of malls at the present time.
In 1H12, 22% of the total retail supply for 2012 became operational, with the remaining supply in the advanced stages of construction and 51% of it ready for fit-out. As compared to other cities, Kolkata and Pune have higher precommitments in projects that are ready for fit-out and expected to commence operation in 2H12, with large spaces signed by anchor retailers and large-format stores in these cities. About 32% of the retail space expected to become operational in 2H12 is in the ‘50-100% structure ready’ stage.
As per the preference of retailers, most of the recent absorption is skewed towards malls with better quality. This trend is largely prevalent in major Tier I cities such as Mumbai and NCR-Delhi. At end-2Q12, NCR-Delhi and Mumbai together accounted for 64% of the total retail space in India, housing 149 of the 240 malls currently operational in the country’s top-seven cities.
A modest increase of 1-2% in rents was recorded in select cities such as Mumbai, Chennai, Pune and Kolkata in 2Q12, while rents in other cities remained stable at the levels seen in 1Q12. Of the top-seven cities, Pune saw the highest increase in rents, up by 1.6%, while Mumbai and Chennai each saw a rise of 1.0%. At 1.3%, the growth in Kolkata’s rents was moderate compared to the previous quarter’s sharp rise of 3.5%.
Persistent high core inflation and lower GDP growth forecasts for FY 2012-13 are likely to moderate consumer spending over the coming quarters. The absorption rate is predicted to moderate to 27% by end-2012, falling from the 41% figure recorded in 2011, due to subdued absorption in 1H12 and a low level of precommitment in the malls expected to commence operations in 2H12. Due to the limited availability of new malls and the low vacancy rates in the existing Prime malls, retailers in such cities as Hyderabad, Chennai and Bangalore continue to actively lease space on high streets. A policy change could be a significant boost for absorption and hence supply, however, it is unknown when India’s government will allow FDI in multibrand retail.
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