Jan 02 2017


Shopping malls catch the fancy of realty investors

Shopping malls catch the fancy of realty investors

Investors in 2016 either acquired malls, or partnered with firms to build new ones
 Mon, Dec 26 2016

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Bengaluru/Mumbai: Investors across the globe shopped for some of the best malls across Indian cities this year, signalling an increasing interest in retail real estate as they bet on long-term gains from the country’s booming consumer economy.

Marquee investment and pension funds such as Blackstone Group Lp, GIC , APG Asset Management NV and Canada Pension Plan Investment Board (CPPIB) have either acquired operational shopping malls, or are partnering with developers here to build new shopping malls or to buy other brownfield assets.

Retail was not a category investors looked at before relaxation of foreign direct investment (FDI) norms in November 2015, as global investors were barred from buying existing retail malls or assets.

“Unlike Xander, which set up Virtuous Retail to undertake ground-up development of retail centres, other global investors did not want to invest at the development stage as large format retail is extremely specialized,” said Sid Yog, founder of investment firm The Xander Group Inc. and its retail arm, Virtuous Retail (VR).

Yog said it’s a new asset class that has opened up for investors in India and those looking for yield are now also considering retail, especially since institutional quality assets, even in the office and warehousing space, for acquisition remain relatively scarce.

In November, Dutch pension fund asset manager APG and VR formed a joint venture to acquire a portfolio of three shopping mall assets from a Xander-sponsored fund for about Rs2,000 crore ($300 million). This is an initial portfolio and the partners intend to acquire more retail assets.

Capitalizing on relaxed FDI norms, rising disposable income and large market potential, institutional investors are eyeing retail assets with greater interest. This year is expected to witness private equity investments of about Rs4,200 crore in retail assets—the highest level since 2008, said a 22 December note by property consultant Cushman & Wakefield.

Driven by the increased demand from retailers, the top eight Indian cities witnessed 10 malls becoming operational —amounting to 5.31 million sq. ft of mall space till September this year, marking the highest number of malls becoming operational since 2012.

After acquiring the largest commercial office portfolio in India, Blackstone Group has also started buying malls now. In December, it bought a 50% stake in Pune Westend mall for Rs600 crore and earlier this year, bought a million sq. ft of retail space in L&T Realty Ltd’s Seawoods project in Navi Mumbai for Rs1,450 crore.

“The reason funds are chasing malls is because of lack of availability of investable assets in office. Most large office owners are waiting for a REIT,” said Ramesh Nair, chief operating officer at property advisory JLL India. A REIT or real estate investment trust is a listed entity that primarily invests in leased office and retail assets, allowing developers to raise funds by selling completed buildings to investors. “We have 720 malls in the last 17 years and only 99 of them are of superior quality. Mall supply over the years has drastically reduced,” Nair said. “While demand is 10-15 million sq. ft per year, supply is only about 5-7 million sq. ft per year.”

Mumbai’s Oberoi Realty Ltd is planning to set up a retail platform, where it will partner with investors.

“…That retail platform will be owned by Oberoi Realty. We will be happy to look at investors at two levels—either at platform or project level depending on how the opportunity turns out,” said chairman and managing director Vikas Oberoi. He said the aim to form a REIT is one of the biggest driving forces behind investors chasing retail assets. It is also setting up a separate mall vertical and is building two malls in Mumbai, investing $200-$250 million, in addition to one mall it operates.

Foreign investors have focused on large cities to buy commercial office and residential assets so far, but due to limited top grade retail assets, they are now also investing in tier II cities.

“The opportunities to buy retail assets in large cities is higher compared to moderate scope in tier II cities. We are looking to build a couple of new malls and acquire operational assets in both tier I and II cities, because we think we can operate them better and add value,” said Atul Ruia, joint managing director, Phoenix Mills Ltd.

CPPIB is in the process of picking up a stake in Phoenix’s subsidiary, that runs the Phoenix MarketCity mall in Bengaluru. Ruia declined to comment on the transaction.

Mumbai-based K. Raheja Corp., which runs the Inorbit chain of malls, is also planning to double its retail portfolio to five million sq. ft of leasing space in the next five years.

“Today, there is a clear cut segregation between good and bad malls and a few quality assets have stabilized and continue to do well. Funds have confidence in certain quality of retail assets and see that this is not a struggling asset class in India,” said Rajneesh Mahajan, executive director, Inorbit Malls India Pvt. Ltd.

Xander’s Yog said it takes a lot of time and a lot of equity capital to build a good mall and one needs deep equity pockets to build quality retail in India.

“Additionally, you need patience. With classic Indian execution issues, it could take up to 5-7 years to build a retail mall of scale and then another 3 years for them to stabilize. Most developers are in the cash churn business and thus it doesn’t work for them, and some investors have that kind of time horizon,” he said. “For many large investors, it’s an opportunity to diversify their portfolios and developers are willing to build more malls now because they have funding and an exit option,” said Vivek Kaul, head-retail services, India, CBRE South Asia Pvt. Ltd.

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