The Hindu Business Line : Retail sets store by cooling realty prices

Even as the real-estate industry is evolving strategies to grapple with the slowdown in the economy, dropping inflows from non-resident Indians and the resultant cooling off, it is the retail sector that waits to make hay while the sun shines.

The retail sector, which began expanding in the last three-four years, suddenly came up against a roadblock — skyrocketing real-estate prices. The steep rise in realty prices in the major metros has made retail companies work overtime to negotiate and renegotiate with property developers to get space at a ‘competitive’ price.

“The cool-off effect has begun to show results. Developers are now showing willingness to renegotiate. As we have decided to expand through both organic and inorganic (franchisee) model, this will help us,” says Mr Ashok Mayya, Chief Executive Officer of Cornerstone.

Cornerstone, a cloth retail brand from ZeroStock Private Ltd backed by the promoters of MedPlus pharmacy group, believes in not keeping huge piles of stocks at the shops. Instead, it just keeps samples of the cloth range, offering a wide variety of options in the smallest possible space as opposed to the spacious formats of other brands.

Asked whether the benefits (of cooling real-estate prices) have begun trickling down, he says, “Absolutely. It makes acquisition of a store property much easier. This, in turn, will reflect in profits. We have certainly seen the change. After all, the (real-estate) prices need to get rationalised,” he says.

Retail potential

A study by Ernst and Young estimates the organised retail industry in the South at 4.9 per cent of the total market in the region, higher than the national average of 4.1 per cent ($11.8 billion in 2006) of the $300-billion retail industry in the country. It puts the total supply of retail space in the South at 14.1 million sq.ft by the end of 2007, representing an increase of 5 million sq.ft in the preceding three years.

Mr Shivram Murti, Chief Operating Officer of More (the retail arm of Aditya Birla Retail), feels that the benefit will be more for larger formats such as hypermarts. “With regard to the smaller formats such as supermarkets, the industry may not get any benefit. As these stores are located on high-streets or busy areas, the prices continue to be competitive. As a variety of players, such as banks and other retailers, compete for small chunks of space, the prices continue to be higher,” he explains.

The cost of rentals has become a major burden on the retailers, particularly in the organised sector, impacting their bottom lines. The retail industry for long has been arguing for a correction in the prices of commercial spaces, keeping in view the wafer-thin margins in the stiff competition. However, Mr Anjaneyulu Kakkera, Chairman of Vah Magna Retail, who founded Trinethra retail malls ( subsequently acquired by Aditya Birla Retail), feels that the sector is yet to see the impact. Anyway, the falling real-estate prices means nothing to major players, with almost 75 per cent of all their expansion already implemented.

“Almost all the major players have set up their malls in all metros. They must have already entered into certain agreements with the developers. So, the present fall might not be of any help to them,” he reasons.

Wait and watch

Mr Girish Malpani, Chief Executive Officer of the Maheshwari group, says the impact (of falling prices) has just begun. “But the actual deals will happen now, in the next three-four months. People (retailers) prefer to wait and watch as the prices begin to fall further. They expect a better bargain,” he observes. The group recently tied up with the global hospitality major Fairmont Hotels and Resorts for developing a 350-room hotel in Hyderabad. A typical sq.ft rental rate for retailers at the swanky Banjara Hills (Hyderabad) area is pegged in the range of Rs 150-250 a month. It is lower in places such as Abids and Himayatnagar (Rs 80-100).

According to him, the rentals also depend on the property. “If it is a standalone property, it could cost less. In malls, it is more because of the value addition (escalators, parking) and cost of the project. The anchor occupant (who takes bulk space) gets the space at a lesser rate,” he says.

Slowdown impact

The retail sector, which seeks to benefit out of the cooling-off effect in real-estate prices, is itself feeling the heat of the slowdown in the economy. Mr Anand Reddy, Executive Director of PBEL property developers, says the high costs of rentals will put severe pressure on return on investments. Pointing out that the return on investments in retail globally is in the region of 8-10 per cent, he says it could be much lesser in India because of the huge rentals. Several retailers have slowed down their expansion plans, while others have significantly cut down on their advertisement spending. That, however, is a different story.