Retail: Stepping Up the Game!

India Retail: Stepping Up the Game 1 2 India Retail: Stepping Up the Game The retail ecosystem in India is at the A†er creating a strong foothold in forefront of change. As consumers expect purchasing income yielding oœice assets experience to become hygiene, retail as an in India, the PE investor will see increased industry is going through seismic shi†s to interest in participating in development in become much more diverse and vibrant. new malls and regenerating existing malls. Trends being witnessed are rationalisation Various new regulations like easing foreign of supply, increased investor interest, investment for single-brand retailers, omni-channel retailing and strong growth longer shopping hours and an updated in ‘Experiential’ retailing. This paper, ‘India framework for establishing Real Estate Retail: Stepping Up the Game’ analyses Investment Trusts (REITs) have attracted some of these trends and showcases the attention of various Private Equity (PE) a promising future for growth of Indian funds and this trend will continue. malls and Retail as a whole. As the current Another case study in the paper evaluates total stock of 76 million sq † of mall space the growing importance of F&B which appears to dri† closer to the 100 million is becoming the key USP for malls. In sq † mark over the next three to four fact, over the past five years, the space years, there will be several changes in the take up by F&B is gaining faster footprint “experience” shoppers will get visiting them. across malls, and will in future be the true Rationalisation of supply is highlighted ‘Experiential’ diœerentiator. in the paper with superior quality malls The paper has touched upon a few estimated to form 62% of the total supply in key trends and its special focus on the future (2018-2022) compared with 46% consolidation is very relevant today with (2008-2012). Developers are making use of the retail sector witnessing increased past experiences and learnings to create activity in terms of acquisitions and more and superior quality malls. Some of mergers. I hope you enjoy the read! the key factors determining the success of malls will be design, varied tenant mix, strength of catchment, infrastructure, amenities etc. But an increasingly influencing factor will be the mall’s ability to counter shoppers’ expectation for Best regards, ‘experience’. The paper also explores the Ramesh Nair key factors that lead to the success of CEO & Country Head a mall through relevant case studies. It JLL India also debunks the o†en held theory that [email protected] successful malls cannot exist in close proximity to each other.

India Retail: Stepping Up the Game 3 4 India Retail: Stepping Up the Game Tab of contents

The Evolution of Organised Retail 6

Supply - Demand Dynamics of India Retail 8

Grade-wise Mall Vacancy 12

Factors Determining the Success of a Mall 13

Case Study: A Story of 3 Malls Defying the Odds 18

Increase in Investor Interest in Retail 20

Way Forward 22

India Retail: Stepping Up the Game 5 The Evolution of Organised Retail

Towards the end of the previous millennium, organised retail as a concept started gaining traction in India.

Malls started coming up in the top Indian cities like Mumbai, and .

There was a novelty factor attached with shopping malls which led to decent footfall right from the beginning.

The retail sector started growing at a rapid pace, and with an increase in spending capacity among consumers, developers started sensing an opportunity and developed malls. This led to an increase in the number of malls.

Consumers had the luxury of fulfilling all of their shopping needs – primarily Apparel, Accessories, Food & Beverage, Electronics, etc – in air-conditioned spaces. The mall also became a popular hang-out spot for families and youngsters alike.

‘Entertainment’ as a concept did not exist in the malls yet, which is why the older malls are seen without any provision for cinemas and entertainment centres.

Multiplexes emerged in the first half of the 2000s a†er which they started occupying space in the malls, oœering a new experience to people and generating more footfall.

In 2011, net supply of malls reached a high a†er which there was a rationalisation in supply in the next few years. From 2012-15, similar levels of absorption and supply were seen.

In the past couple of years, mall management has evolved and is more focused on experiential retail. More international brands have entered, the number of promotional activities and events in the malls have increased, and there are also pop- up stores to generate interest among people.

6 India Retail: Stepping Up the Game Growth of Mall Space in India Over the Years

76 80 70 67 70 62 61 60 55 52

50 40 40 34 28 30 21 20 14

Cumulative Mall Stock in India (mn sq ft) Mall Stock Cumulative 11 8 10 5 1 0 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Real Estate Intelligence Service (JLL), 1Q18

246 Cumulative Number 219 232 212 203 188 of Mall Openings 180 152 130 Over the Years 115 90 69 54 37 24 8 1 2 3 4 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Cumulative Number of Mall Openings Source: Real Estate Intelligence Service (JLL), 1Q18

India Retail: Stepping Up the Game 7 Supply -Demand Dynamics of Indian Retail

• 2011 witnessed record supply and quality* malls are either getting converted absorptions of mall space in India to other use or downgraded to a Grade B shopping centers. • Therea†er, there has been a slow growth of the sector due to overall GDP • This resulted in negative supply for the slowdown and weaker consumer and first time in 2016 investor sentiment • Future years look bright with a healthy • Recently, there has been supply pipeline and robust absorptions rationalisationof mall space, particularly in NCR and Mumbai Metro Region. Poor

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mp 5% 6 3 8 3 1. Co 1. 0. 0. 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F -2 0% Net Completions Net Absorption Vacancy

Source: Real Estate Intelligence Service (JLL), 1Q18

*The malls have been graded as poor, average or superior based on the following criteria:

Level of mall Choice of Rental/Strata Vacancy Tenant Mix Rental Values Design Levels management Location sale model

8 India Retail: Stepping Up the Game Supply -Demand Dynamics of Indian Retail

India Retail: Stepping Up the Game 9 10 India Retail: Stepping Up the Game Asset quality-wise break up

Operational mall stock from 2008 to 2012 Future supply pipeline of 5 Years (2018-2022) ~ 90 Mall projects ~ 34 mn sq ‹

Average Average 35% 28%

Superior Poor Poor 46% 19% 10% Superior 62%

The years 2013-2017 witnessed extremely low new supply Superior Average Poor and hence are not adviseable for granular analysis.

Source: Real Estate Intelligence Service (JLL), 1Q18 More developers are maturing

• In the past, many developers entered • Developers who opted for into the retail space and constructed appropriate locations with good malls without precise understanding visibility and strong catchment area, of the dynamics related to the sector. tasted success. As a result, either the product was • Developers who invested in mall poor which led to weak demand management and tenant mix which for retailers or the location and are two essential factors, whereas the catchment area was not appropriate. others who failed to the get the right This constrained the scope for formula performed poorly. success in these malls and became a reason for the dichotomy that was • Developers have now learnt from their observed in the sector. past mistakes and only experienced players are continuing to build malls. • Poor quality malls struggle to survive whereas malls of superior quality • As a result the percentage of future continue to attract demand from supply which is expected to be of prominent retailers in both domestic superior quality is greater than in the and international category, and existing stock successfully draw people in. India Retail: Stepping Up the Game 11 Grade-wise The diœering vacancies among diœerent grades reiterates the point that good quality space gains traction while poor quality assets will struggle. Gradual rationalisation of mall space in is helping Mall Vacancy showcase actual vacancies in cities. 50% 46% 45% 44% 45%

39% 40% 35% 35% 31% 29% 30% 27%

25% 22% 22% 19% 20% 20% 18% 17% 15% 14% 14% 14% 14% 15% 12% 11% 10% 11% 9% 10% 7% 8% Vacancy in operational malls in operational Vacancy 7% 6% 7% 7% 5% 4%

0% NCR DelhiMumbaiBangalore ChennaiPune KolkataIndia

Superior Grade Average grade Poor Grade Overall Source: Real Estate Intelligence Service (JLL), 1Q18

12 India Retail: Stepping Up the Game 3 Factors Determining the Success of a Mall

• Mall design makes a diœerence with • Catering to a varied tenant mix draws in internal ease of access, appropriate crowds to the mall with keeping visitors positioning of stores, and strategic interested positioning of escalators and elevators • Good mall management plays • Malls which follow the lease only model an important role Product tend to perform better as it becomes • There is generally adequate parking in easier for asset quality control and mall most good malls management • Frequent events and promotional activities improve the scope of walk-ins

CASE STUDY 1: ,

• In 2013, the entry of Viviana mall in Thane threatened the dominance of which is almost half the size of Viviana and only about a kilometer away. • Korum responded well when its tenant mix improved by adding more F&B options. The mall brought-in Starbucks, Burger King, and theme restaurants like Copper Pan, Woking Mama, and Panchvati Gaurav on the second floor. • Proportion of F&B in the mall went up to 15-20% from 10-15% • Thane market has now absorbed both the malls well. Both Korum and Viviana, are now doing good business.

CASE STUDY 2: Mall, Delhi NCR

• Select City Walk mall commands one of the highest trading densities amongst all the malls in the country • Over the years, the mall has essentially improved its tenant mix, as is noticed in the graphs below:

2011 2017 Select City Walk 2011 Select City Walk 2017 Occupiers Share Occupiers Share

Source: Real Estate Intelligence Service (JLL), 1Q18

India Retail: Stepping Up the Game 13 14 India Retail: Stepping Up the Game • Size of the residential population • Accessibility is another key factor, as the must be looked at, targeting densely mall should be conveniently located populated areas before constructing a • All successful malls generally have mall. excellent frontage and visibility • The income profile of the target Catchment • Developers will also have to identify catchment is another important factor whether they would like the malls to to study before a mall comes up with a cater to people in commercial districts, launch strategy residential districts or a mixture of both

CASE STUDY: Xperia, Palava

• Xperia mall came into the picture in mid-2016 with much grandeur from one of the leading Real estate developers. Despite being located in Dombivali (east) - one of the far oœ suburbs of Mumbai, the mall continues to transcend success with a high footfall, primarily guaranteed by the fact that the mall is a part of a township. • The mall adopted several anchors to make its presence felt. Various prominent brands like Van Heusen, Peter England, PVR Cinemas, Big Bazaar, Reliance Digital, Reliance Trends and Timezone were introduced. This generated high walk-ins - both shoppers and window shoppers. • Since many customers visit the mall primarily for food and entertainment, Xperia kept the proportion of F&B retail high. It has a well maintained foodcourt with a bright decor and a good mix of F&B options.

India Retail: Stepping Up the Game 15 • Shoppers are increasingly chasing • Space share of experiential retail - experiences, not just merchandise. They restaurants, cafes, QSRs, theme-based are also getting more tech savvy, time entertainment etc.has gone significantly constrained, aspirational and upwardly up over last 5 years in the top malls mobile • Experiential retail enhances repeat • Retailers experimenting with newer visits, provides a solid moat against formats are adopting technology to e-commerce which can only oœer Customer engage shoppers merchandise. • Newer formats eœectively use • Examples include Big Bazaar Gen Next, experience technology for in-store experience, Van Heusen Style Studio, Benetton faster check-out, better displays and On-Canvas Family Store, Max Millennial digital trial rooms stores, Future Group Cover Story, Mcdonalds McCafe • Increasing adoption of minimalistic store design, light-weight modular fixtures, and focused lighting

16 India Retail: Stepping Up the Game (Strong)

(Strong) Above average rentals. However, despite having Highest rentals in the cities. These a strong product, they malls have the cannot command the advantage of good Impact of highest rentals due to quality as well as a a weaker catchment strong catchment. compared to the best Product, ones. Catchment and Experience Rentals are lower Experience on as compared to Marginally better better quality assets rentals than assets at better locations. of similar quality but Mall Rental weaker catchment.

(Strong) Product Catchment

India Retail: Stepping Up the Game 17 A Story of 3 Mumbai Malls Defying the Odds CASE STUDY:

A prevailing perception is that malls cannot co-exist successfully. 3 malls in Mumbai – Infiniti, Oberoi and Inorbit - have realised the potential of the catchment and have diœerentiated themselves, defy this perception to make an insightful point - A strong catchment can sustain multiple malls.

Madhukar Digambar Deshpande Marg

Road Gen A K Vaidya Marg

Link Goregaon Link Road Go ink Rd.

Infiniti Mall Oberoiregaon Mulund Mall L 2 Km

Aarey Flyover

Road

Aarey Road

Goregaon Link Marol-Marosi Road

Chinch Sonawala Road

owali Mahatma Gandhi Road

Bandar Link

Road Srirang Sabde Marg

Western Express Highway 2.9 Km Haribhau 3.5 Km

rg Ru pawate Marg Prabhodhan

Mrinaltai Gore Flyover Ma rg

yover Kamala

tai fl karpant L karpant Maulana Jiauddin Bukhari Ma Mrinal

Road Walawalkar Mg Walawalkar

Service

Lions

Swami VivekanandRoad

Main Sol

Ma Road

rg

Inorbit Mall

• As observed in the map above, the 3 malls lie within a 2-3.5 km of each other.

• Despite being in close proximity to each other, all 3 have a high footfall for their unique positioning and location advantage.

• The number of contributing reasons are similar and unique pertaining to each mall.

18 India Retail: Stepping Up the Game Accessibility/ Location Catchment Profile Strategies Adopted Tenant Mix

Infiniti mall is situated on Lower Middle • Known for leading CSR-based events that All 3 malls have a the Link road (Another Income to Upper attract people from both Middle and Upper unique tenant mix prominent road for the Middle Income Middle Income groups. from all categories suburbs of Mumbai). This group • The mall, in association with The Street including mall also has easy access Store (TSS), has put set up kiosks that high-end for people living in Malad, enable mall patrons to deposit their unused brands, fashion, Infiniti Kandivali and Goregaon. clothes, accessories that in turn help in accessories etc. distribution to the poor and needy. with a proper mix Mall • Infiniti mall is the only one in the area to of entertainment have introduced an indoor roller coaster, and F&B which is which brought in huge success in the area a critical category of gaming and recreation. now-a-days for the success of any mall. Oberoi is situated on the Middle Income Oberoi Mall has been instrumental in bringing western highway, and to Upper Middle in many International brands like Forever Oberoi hence provides easy access income group 21(no longer present), Forever New, Starbucks, even to shoppers from the Aeropostale, United Colours of Benetton, Burger Mall eastern locations like Malad, King, and Crossword, especially to the western Goregaon and Kandivali suburbs

Inorbit mall is again situated Lower Middle • This mall is amongst the early adopters on Link road capturing Income to Upper for omni channel supply (currently houses nearby crowd from Malad & Middle Income 10% online and 90% oœline stores) Goregaon as well as far oœ group • They have introduced India’s first Omni areas like Kandivali East and channel Online Shopping program merging Lokhandwala Township the online shopping convenience with the Inorbit brick & mortar space where the oœer is made on website as well as an app based Mall feature. • The mall has a good retail oœering in terms of price points and better products. It also has more space allocation to F&B and Entertainment.

India Retail: Stepping Up the Game 1919 Increase in Investor Interest in Retail RE PE funds have been very active over the last 2 years in acquiring equity/debt in retail properties across Tier 1 and Tier 2 cities

300

250 2018 has looked 200 promising so far in terms of interest 150 among investors 100 in acquiring retail properties 50

0 2015 2016 2017 2018 Jan - Mar Source: Industry source

Looking at the past few years

• There has been increased private • Various new regulations like easing equity interest in key leasehold retail foreign investment for single-brand assets across the country. retailers, longer shopping hours and an • A leasehold retail property usually has updated framework for establishing real a higher probability of success as the estate investment trusts (REITs) have developer is actively involved in the attracted the attention of various private key functions of mall management, equity funds especially tenant management.

20 India Retail: Stepping Up the Game A close look on recent PE deals (2015-1Q 2018) Year Deals

• Blackstone acquires two retail assets of Alpha G:Corp in Amritsar and Ahmedabad 2015 respectively for around INR 800 cr.

• Blackstone had bought a 1 mn sq ft retail mall (adjacent to the office tower in Seawoods), from L&T Realty for over INR 1,400 cr. • Blackstone bought stake in - Westend mall, Aundh for INR 600 cr. 2016 • Singapore government-owned GIC bought 50 per cent stake in Viviana Mall in Thane, on the outskirts of Mumbai, for over INR 1,000 cr.

• Virtuous Retail (Xander Group and Dutch pension fund APG retail platform), bought North Country Mall - a retail property in Mohali, Punjab for INR 700 cr. ($109 million) from SUN-Apollo –JJ Gumberg. • Blackstone arm bought Chandigarh’s (along with the office block) for an 2017 estimated INR 2,200 cr. • GIC bought 33% stake in DLF commercial portfolio arm for INR 8,900 cr., which included DLF Emporio and Promenade malls in Delhi NCR.

• Phoenix, CPPIB bought L&T land for INR 650 cr. in north Bengaluru in 2018. 2018 • Blackstone bought 85% stake in Nitesh’s Pune mall for INR 300 cr.

Source: Industry sources

India Retail: Stepping Up the Game 21 Way forward

• Superior grade malls across the tend to be poorly managed strata-sold few months as long as the older country will continue to enjoy near properties. mall takes steps like refurbishment, 100% trading occupancy, excellent • Online vs Physical stores debate is improvement in tenant mix, better consumption and steady rental growth. a thing of the past. Consensus has access, greater engagement with the • We will continue to see stock emerged around omni channel. local community. consolidation. Some of the weak E-commerce companies are rolling • Shoppers are increasingly chasing properties will divert to non-retail out physical stores and traditional recreational experiences rather than uses like small oœices, hospitals, brick-mortar retailers are making shopping alone. Malls are responding educational, healthcare and survive. large investments in web, mobile and with greater space share allocation to Out of the upcoming supply, the supply-chain integration. Below is a restaurants, cafes, delis, theme based malls under the superior category quick analysis of some of the prevailing entertainment spaces, spas, cinema. ought to do well as they have the right brands that have adopted omni • Traditional retailers too are fundamentals. The rest might struggle. channel sales channels. responding to the change in customer • The overwhelming majority of failed • The entry of a larger mall in a sub- preferences with new formats that malls fail due to poor mall design, market should not adversely impact make their stores more experiential in layout, circulation, tenant mix, and the entrenched malls beyond a contrast to the earlier focus on sale of merchandise.

E- Commerce OMNI Traditional Firms with channel Retailers now Physical Retail E-Commerce Stores enabled

Pepperfry Croma – Tatacliq.com Lenskart ShoppersStop.com Flipkart H&M.com Nykaa Forever21.com Vyolla Aditya Birla – Abof.com, Bombay Shirt Company Trendin.com Bigbazaardirect.com Godrej Nature’s basket Reliance-Ajio.com, realiantrends.in

22 India Retail: Stepping Up the Game • India could do with additional • Fast fashion, F&B and entertainment • Plans are already underway by many presence of global retailers. operators again dominate leasing with global, designer private labels to enter Strong sales performance of many superior quality malls being the main the Indian apparel and accessories recent entrants to the market target for space. market, particularly in the luxury and penetration of select retailer • F&B operators remain the most active bridge-to-luxury segments. categories beyond 7 metros presents a retailers category in India’s major high huge untapped opportunity. streets, followed by apparel. • Investments in retail RE over last • International brands have been 2 years dwarf the cumulative entering the country and expanding investments made over last 5-7 years. in the past couple of years, and more The future looks promising. are expected to look for quality space • Landlords in India are actively across the country. adjusting tenant mixes and placing • 100% FDI in single-brand retail greater emphasis on the experience of may bring in more global retailers, shopping. especially in the fast fashion category.

India Retail: Stepping Up the Game 2323 Contacts

For business enquiries, contact Special Acknowledgement

Pankaj Renjhen Ashutosh Limaye Managing Director, Retail Head, Research and REIS +91 98992 18885 +91 98211 07054 [email protected] [email protected]

Authors

Subash Bhola Sumedh Gadgil Titikshya Sahoo Local Director, Research Analyst, Research Analyst, Research +91 97693 78766 +91 98927 47489 +91 75063 77403 [email protected] [email protected] [email protected]

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