Tips to invest in India's retail real estate market

Foreign direct investment (FDI) in retail has put India on the global map and has investors thinking about India's retail real estate market.

Retail real estate is linked to the retail industry, a sector that has had its share of peaks and troughs in the past decade. Overall, investor sentiment towards retail real estate remains favourable as India's economy has been less vulnerable to the slowdown relative to other markets. However, while the retail sector is poised for growth, its pace is likely to be slower than expected.

Retail realty as compared with commercial or residential is complex. Unlike a home buyer or an organisation looking for an office, an investor in retail needs to evaluate many factors. You have to assess demand for retail space, return on investment, performance of retailers, commercial trends, laws governing retail leases and even consumer spending.

The retailer is crucial to the realty investor. He determines an investor's return on investment (through rent, minimum guarantee or revenue share). The motivation to lease retail space is, in turn, determined by the amount of sales a retailer can expect in an area, which is linked to factors like consumer spending and disposable incomes. All of this makes retail realty a complex investment decision.

The developer is another critical link in this chain. It is better for investors to choose malls that are managed by a professional agency or by the developer, as compared with strata sale malls (each unit sold to an individual owner). Investors can also consider mixed-use projects. It offsets risk by having captive demand for residential and retail and offers long-term stability. However, on the flip side, shops in mixed-use projects have a limited scope for retail activities (stationery shops, chemists, florists, small restaurants and so on).

The return on investment and the revenue model is also important. The revenue model has evolved in past few years-a gradual shift from only rent to minimum guarantee or sharing revenue. Retailers are now paying a base rent along with a share of the revenue. This allows retailers to bring down fixed costs and pass some business risk to the owner. However, this demands a higher risk for the investor.

The challenging economic conditions, falling rupee and political uncertainty have made India more vulnerable. Amid this, the one trend that seems to hold is the demand for quality retail space. This makes for a sound investment and returns in the long term. The retail FDI policy should also bring some demand from international retailers in a few years. Investments in such developments are bound to be profitable in the long run and bring momentum to the retail real estate investment market.

ANSHUMAN MAGAZINE
Chairman & MD, CBRE South Asia