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From Thailand’s retail brand Lotus Art to French sport retailer Decathlon and Japan’s fast fashion brand Uniqlo, global retailers are knocking at the doors of the Indian Government for its approval to set up shops here.
While companies may sooner or later get the nod for starting operations, experts say that finding quality retail space and affordable rentals may prove to be a problem.
Lawyers and investment partners of such companies who are keen to enter India say that the rent-to revenue ratio may make their business unviable.
‘One-street business’
Rahul Khanna, Managing Director, Canaan Partners, who has invested in several e-commerce ventures, says that it is unlikely that his company will make investment in brick-and-mortar space. “Retail is a one-street business and isn’t capital-efficient. The pay-offs are much later. Also, the high rentals make it a risky business to invest in.”
According to a Jones Lang LaSalle quarterly report, foreign retailers are deferring their plans to enter India by a year or two because of high real estate costs and impending elections in 2014.
This is despite the AT Kearney’s Global Retail Development Index 2012 pointing out that India is the fifth most favourable destination for international retailers.
Citizen Watches (India) Managing Director Katsusuke Tokura said that the company would like to have more stores in India but the prohibitive prices have forced it to go slow. “We are constantly negotiating on our rentals to stay profitable,” he said adding the company is going slow in opening mono-brand stores and instead opting for multi-brand channels.
Simon Rubinsohn, chief economist of Royal Institution of Chartered Surveyors, said in recent report, “Developers within the commercial space are facing problems of funding. Meanwhile, India has not been able to attract a lot of foreign investments in comparison with other countries such as China and Malaysia within the region. Issues such as high inflation, large budget deficit and the slow pace of regulatory reforms are weighing down on business sentiment.”
Investment queries
RICS, a professional body for qualifications and standards in land, property and construction, points out that investment enquiries increased modestly in the first quarter of the year compared with the previous quarter. Real estate sources point that most retailers are keen to enter either Delhi or Mumbai. However, finding 15,000-20,000 sq feet of retail space in the right location is difficult even though many malls are coming up.
Companies such as H&M have been making substantial enquiries but are yet to zero in on a location. Decathlon, however, has decided to set up its shop in Bangalore and Mumbai.
A report by DTZ, a global real estate advisor, pointed out that retail leasing activity was more restrained in the first quarter of 2013.
“Although enquiry activity, from both domestic and international retailers, is still comparatively strong, the conversion rate of these enquiries is subdued. Since a transaction of such nature normally takes approximately six-nine months to complete, any increase in take-up is not likely to occur until the second half of the year,” it added.
As a reflection of subdued tenant demand, addition of supply too has slowed. The lacklustre sentiment in the retail sector is seen in delays in project completion to the extent that 2.1-million sq ft of mall space that was scheduled to be completed in Q1 of 2013 has been delayed by three-six months, DTZ said.
City outskirts
Industry watchers say that companies may look at city outskirts or even micro markets as their next big bet.
Bappaditya Basu, Senior Vice-President - Retail and Leisure Advisory, said, “Big hypermarkets, cash-and-carry outlets, furniture dealers and designer wear stores often cannot find sufficiently large retail spaces within the city. Such stores tend to look for out-of-town properties in locations that are in line for anticipated growth as indicated by the directions in which the city is expanding. This trend has given rise to some popular out-of-town weekend shopping destinations.”
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