Establishing its position as one of India’s fastest growing markets for organised retail, Chennai accounted for over half of the new property rentals and purchases that took place in the space in January-September, 2013.

According to real estate consultancy firm Jones Lang LaSalle’s Indian Real Estate: A Review Of 2013 And Outlook for 2014 report, Chennai witnessed the strongest retail real estate absorption in the first three quarters, at 53 per cent of net rentals and property purchases across the country during the period.

Vacancies fall

Consequently, vacancies in the Chennai retail property space fell by approximately 6 per cent. Chennai was also the city where overall rentals and capital values slipped the most, due to a large influx of supply in suburban locations, where prices were cheaper.

Kolkata and Mumbai were the second and third-best performing markets from the perspective of retail space absorption, according to the data. But unlike Chennai, the increased demand in these markets was not supported by strong supply and as a result, overall rentals and capital values in these cities increased in the range of 5-10 per cent year-on-year.

Organised retail currently accounts for around 7 per cent of the total retail market in India, with the remaining constituted by unorganised players. This is lower than in other emerging economies such as Brazil (35 per cent) and China (20-25 per cent) and developed markets such as Japan (66 per cent) and the US (85 per cent), indicating there is scope for greater penetration in the coming years. This is likely to translate into greater absorption of retail spaces in the coming years.

Additional space

Looking forward to 2014, Jones Lang LaSalle estimates that close to 9 lakh square metres of additional retail space will come into the supply pipeline in 2014, up from 5.9 lakh square metres in 2013. Cities such as Delhi, Hyderabad and Bangalore will witness good supply of retail space, largely around their expanding peripheries.

Due to limited supply of modern retail spaces in these areas, the new supply will meet with favourable pre-commitments for rental or purchase.

Nevertheless, rental and capital values will remain stable in most cities amid the overall slowdown in the real estate sector.

At the same time, these factors could prove to be incentives for retailers to enter the market or expand their business.

The food and beverage segment accounts for the highest share of the total market for retail space in the country, at approximately 70 per cent. But the organised sector’s share in this high volume-low margin segment is only around 2-3 per cent.

It may be some time before this situation changes: the entry of foreign multinationals into the retail sector likely to be the tipping point.

This category has the potential to digest heavy investments in light of the weakness in back-end infrastructure in India.

In the case of high margin categories such as clothing, footwear and beauty and personal care, rental and purchase of retail property is likely to be higher in 2014.

This will be driven by modern retailers’ attempts to increase their footholds in these segments, given the rising lifestyle aspirations of Indian consumers. The increased foothold of the organised sector will generate demand for additional mall space, in particular.

(This article was published on December 29, 2013)
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