Forget Dying, Shopping Malls Are Thriving In India. Here’s Why

“I went to a mall at least twice a month initially,” Kirtika, owner of a chauffeur-driven car service, said. Now, she goes much more frequently. Gujaratis love to shop, eat out, mingle and live a good life, and malls have made that easier, she said of a culture that has drawn the young and the old alike.

Many may dismiss her enthusiasm as hyperbole when malls are dying elsewhere, and smartphones and internet have shrunk the world into a palm-sized shopping window. But investors aren’t. They have poured money into the business in India, even undeterred by the worst economic slowdown in a decade. For them, Kirtika symbolises the target consumer. A 27-year-old earner in a Tier-II city of the world’s second-most populous nation where 650 million—the combined population of the U.S. and Brazil—are younger than her.

“In India, foreign investment is chasing malls and not the other way around. This is because malls in India are doing extremely well,” Shobhit Agarwal, managing director and chief executive officer at Anarock Capital. “Unlike in developed countries, Indian malls are virtually the only source of entertainment for a majority of urban dwellers. Developed countries have a plethora of outdoor options like watersports, mountaineering, picnic and camping zones and hiking trails.”

Asia’s third-largest economy is still predominantly served by informal retail. But’s that’s changing. According to a Deloitte report, the organised sector—shopping malls and supermarkets—is expected to reach 18 percent of the $1.2 trillion market by 2021.

Still, the mall developers have seen once boom cycle go bust in the past. Two decades ago, real estate players rushed to build shopping complexes and, within the decade, that turned out to be unsustainable. So what changed for this renewed push?

“Developers have become more mature and now know what works in the market and what doesn’t,” Pankaj Kapoor, founder and managing director of retail consultant Liases Foras, said. The biggest change has been increase in consumerism and technology, he said. While tier 1 cities have reached a saturation point, demographics of tier 2 & 3 cities changed, he said. “These cities also lack good quality developments. All this has ensured a new sustained growth for mall developments.”

Vadodara, a city of more than 21 lakh people, has at least 15 shopping malls. A 1,358 square feet for every 1,000 people, according to Cushman & Wakefield. That’s second only to Chandigarh among Indian cities. Still, the national average is 93 sq. ft—among the worst in the world—offering a huge scope for growth.

No wonder then, the likes of Phoenix Mills Ltd., backed by private equity firms, are aggressively expanding both in metropolitan cities, and beyond.

Private Equity Investments

Anarock Research estimates at least 31 malls spanning over 1.3 crore sq. ft are scheduled to come up in Tier-I cities like Delhi-NCR, Mumbai Metropolitan Region, Bengaluru, Pune, Hyderabad, Chennai and Kolkata. As many as 16 malls with an area of over 70 lakh sq. ft would come up in Tier-II and III cities.

Private equity has aided the migration of malls outside the top cities, Ramesh Nair, country head of real estate consultancy JLL India, said. “Funds like Blackstone through their Indian subsidiaries have invested in retail assets of Tier-II cities including Ahmedabad One Mall, Elante Mall in Chandigarh and Treasure Island Mall of Indore.”

Lack of available space, high rentals, overcrowding of brands and high land prices in Tier-I cities and air connectivity to Tier-II centres aided that, he said.

Most Tier-II and III cities are underserved and they always have the potential for development, according to Rajneesh Mahajan, chief executive officer of Inorbit Malls, a K Raheja Group company that operates shopping complexes in Mumbai, Hyderabad, Vadodara and Bengaluru. One advantage for a developer, according to him, is that a relatively slower growth and competition than metros provides enough time to establish presence.

Investments in retail, according to data provided by Anarock Property Consultants, rose to a five-year high in 2019. Inflows jumped threefold over the previous year to over $970 million last year. Agarwal said, the sector received the second-highest investments after commercial real estate. Investors, he said, are betting on select grade-A or premium mall projects.

Retail sector investments have a long gestation period and require patience. Private equity funds that pool in money from large institutions, pension funds and wealthy, have the appetite.

“Land pricing is high in prime areas and together with compliance costs, it becomes very expensive. “If you go through traditional sources of funds, everything becomes too costly,” Manoj Agarwal, chief executive officer of Viviana Mall in Thane, told BloombergQuint. Singapore’s GIC Pte Ltd. invested $150 million in the mall in 2016.

But through private equity firms, developers get cheap funds that makes their investment substantially low, he said. The investors, according to him, get a potential upside which is much higher than in any other geography.

Rahul Saraf, managing director of Forum Group, owner of a mall in Bhubaneshwar and Kolkata and building another in Odisha, said having a private equity fund’s backing can protect a mall developer from any geopolitical risks. “For all these investors, their exit route will be REITs (real estate investment trusts). And through REIT we will have fractional ownership of many malls spread across cities. This will not only diversify portfolio but there are more advantages than risks.”

‘Window Shopping’

Private equity investments helped commercial and retail real estate defy the slump that caused the inventory of apartments to pile up as funding from non-bank lenders dried up following the defaults by IL&FS Group companies in September 2018.

Malls are also seeing business pick up after Indians cut back spending in a slowing economy. Deva Jyotula, vice president-retail at Thane’s Korum Mall, and Agarwal of Viviana Mall said sales have rebounded.

Still, despite the optimism, developers and investors can’t wish away the online buying frenzy. Cheap data and low-cost smartphones mean Indians are increasingly ordering grocery to apparel on Amazon, Flipkart and Myntra. Online sales of electronics, especially mobile phones, have hurt brick-and-mortar retailers in the last half decade.

Kirtika of Vadodara underscores this challenge. She mostly visits malls to eat and meet people. “To be very honest, these days I window-shop as I purchase most of my stuff online where I get better deals and convenience.”

Pankaj Kapoor, founder and managing director of retail consultant Liases Foras, doesn’t see that as a threat. E-commerce can’t replace the brick-and-mortar experience, he said, and there’s a parity between prices online and stores. The two channels, he said, will complement each other rather than compete.

According to Agarwal of Anarock, configurations of malls will, however, change. Already, food, fashion and entertainment occupy 40 percent of the area and space allocated for electronics retail has come down.

That could be a precursor to another change in the model of mall business. As Saraf of Forum Group described it, the role of a developer has changed from ensuring sales to the one providing target audience.

Malls have become like a media platform that allow brands to engage one-on-one with customers, who get to touch, feel and experience the product that is available online, he said. “Soon enough, retailers occupying spaces in malls will have to start looking at this as a ‘cost centre’ rather than a ‘profit centre’.”