The demand in terms of net absorption has remained subdued in first half of 2012 amid careful expansion by retailers, says Subash Bhola, Sr. Manager- Research, Jones Lang La Salle, India. Net absorption of retail space fell by 57 percent from the levels seen in the first half of 2011. A watchful approach by the retailers coupled with the lack of quality malls and postponed projects was the main cause for the sluggish absorption.
In the past six months, only 2.3 million sq.ft. of operational retail space was 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 percent at the end of the second quarter of 2012, a drop of 140 bps from fourth quarter of 2011. Because of the uncertain economic climate and weaker business sentiment, developers have been and continue to be cautious about new mall launches.
In the first half of 2012, 22 percent of the total retail supply for 2012 became operational, with the remaining supply in advanced stages of construction and 51 percent of it ready for fit-out. As compared to other cities, Kolkata and Pune have higher pre-commitments in projects that are ready for fit-out and expected to commence operation in the second half of 2012, with large spaces signed by anchor retailers and large-format stores in these cities. About 32 percent of the retail space expected to become operational in second half of 2012 is in the “50-100 percent structure ready” stage.
In accordance with 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 Delhi-NCR. At the end of second quarter of 2012, Delhi-NCR and Mumbai together accounted for 64 percent of the total retail space in India, housing 149 of the 240 malls currently operational in the country’s top 7 cities.
A modest increase of 1-2 percent in rents was recorded in selected cities such as Mumbai, Chennai, Pune, and Kolkata in the second quarter, while rents in other cities remained stable at the levels seen in the first quarter of 2012. Of the top seven cities, Pune saw the highest increase in rents – up by 1.6 percent – while Mumbai and Chennai each saw a rise of 1.0 percent. At 1.3 percent, the growth in Kolkata’s rents was moderate compared to the previous quarter’s sharp rise of 3.5 percent.
Bhola said that persistently 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 percent by end-2012, falling from the 41 percent figure recorded in 2011. This is due to subdued absorption in the first half of 2012 and a low level of pre-commitment in the malls expected to commence operations in second half of 2012.
With the limited availability of new malls and the low vacancy rates in the existing prime malls, retailers in cities such as Hyderabad, Chennai, and Bangalore continue to actively lease space on high streets. A policy change could be a significant boost for absorption, and therefore supply; however, it is uncertain when Indian government will allow FDI in multi-brand retail.
