INDIA GRI 2010

6 OCTOBER 2010

GRAND HYATT – MUMBAI

DISCUSSION REPORTS

SUMMARISES PUBLISHED IN ASSOCIATION WITH THE STUDENTS FROM

Indian School of Business, Gachibowli

www.isb.edu
DOING DEALS IN INDIA – do returns justify or have expectations changed?

 This discussion commenced with dividing the participants into two groups – Investors and
Developers.
 While most developers believed that expectations of investors have been forced to change to
more reasonable expectations, investors stated that the majority of their expectations from the
beginning have remained reasonable.
 Developers were of the view that investors entered the Indian market expecting exorbitant
returns on their investments and that it wasn’t possible for the developer to promise such
returns to the investor.
 Developers also stated that investors were looking more towards short- term investments and
were not interested in long-term commitments to the industry in India.
 Developers felt that equity investors wanted debt-like security to downside risk but wanted to
be compensated for the upside gains.
 The Private Equity representatives in the room had a different perspective - they made it clear
that no foreign investment into India would be satisfied with a return of less than 20%.
 Most US based funds preferred investing in China over India and their investments in China
were yielding about 18%-20%.
 Investors stated that their expectations did not change in terms of expected returns (between
20% and 25%) but their expectations in terms of due diligence and transparency have greatly
increased. Their main concern was related more to risk than return.
 The developers and investors in the room reconciled to state the below takeaways from the
discussion:
 A return between 20% and 25% was agreeable to both investors and developers.
 Investors agreed that they need to be more long-term oriented in their decisions.
They believe a major expectation change is that investors now spend a lot of time
doing due diligence to ensure they are partnering with the right developers. They
intend to partner with the same developer for their future projects once the
developer has proven his execution capability.
 Both developers and investors hope that the Government of India will change
regulations to ensure more exit strategies for the investors.
 Investors have to bear more risk to justify their return expectation. They cannot
expect downside risk protection and operate like debt lenders.
 The real estate industry in India is still at a nascent stage. A lot of regulation changes
are bound to change expectations.
 Investors are looking for more transparency from real estate developers.
 While some investors have been looking for deals with unrealistic returns (greater
than 35%), a majority of the new funds entering India are more realistic about their
expectations.
PRIVATE EQUITY AND CAPITAL RAISING – new trends or old expectations?

 The first major trend discussed was the dominance of domestic private equity finds over foreign
funds.
 Domestic funds have a great advantage of foreign funds in the aspect of how long they are
locked into an investment.
 This advantage allows domestic funds to demand a smaller return than the foreign funds.
Domestic funds normally expect a return in the range of 18% to 20%.
 The second trend was that funds were increasingly favoring ‘short-term’ investment or
opportunities to invest in completion of projects.
 The completion activity is relatively less risky so the investors don’t mind providing completion
capital.
 However, in order to attract capital for expansion developers will have to address the
transparency issues plaguing the industry.
 Investors were complaining about how developers promised to have exit strategies ready by
year 3 but were unable to even start the project by then.
 Investors in India face two types of risk – land risk and execution risk.
 A few years ago, investors were ready to bear both these risks and were ready to invest in
projects even before land was acquired. In the current scenario, investors are ready to only bear
execution risk.
 One of the key challenges that investors have faced while considering investments at a company
level is the long term competitiveness of these companies and their ability to gain and sustain
competitive advantage.
 Markets around the world are currently presenting extremely lucrative, in fact historic,
opportunities to invest in assets that no one thought will be available, let alone at current
prices.
 Faced with such opportunity in more mature and familiar markets, the FIIs will think twice
before taking up an investment in India, especially when the developed markets are promising
far better returns.
T1 VS. T2 OFFICE – is the time right for either?

 Tier 1 commercial office space can be differentiated from Tier 2 office space with regard to the
following factors:
 Location
 Quality
 Developer
 Most often, Tier 1 commercial office space is differentiated from Tier 2 office space due to the
location of the development.
 In India, Mumbai and Delhi are considered Tier 1 cities whereas Bangalore, Chennai,
Hyderabad, Kolkata and Pune are considered Tier 2 Cities.
 The dynamics of Tier 1 and Tier 2 commercial office space are very different.

Tier 1:

 Vacancy rates in Tier 1 cities is about 18%-20%.

 The recovery of the real estate industry is far superior in the residential market when compared
to the commercial market.
 A lot of commercial projects have been put on hold or have been converted to residential
projects.
 Even in terms of quality, Tier 1 cities have seen better quality commercial office than tier 2
cities.

Tier 2:

 Vacancy rates in tier 2 cities is about 25%-30%.

 Hyderabad has been the worst hit due to the Telangana movement and has been struggling with
a 35% vacancy rate.
 A majority of the expected supply has been put on hold. However, the reviving economy is
expected to have a positive effect on the commercial office market.

 Demand for commercial office space has been moving from Tier 1 to Tier 2 cities as companies
are losing their cost advantage of being present in Tier 1 cities.
 As the costs of doing business in Tier 2 cities is also increasing, the opportunity for developing
commercial space in Tier 3 cities is vastly increasing.
 A large number of developers have found it more lucrative to develop commercial office
projects in Cochin and Jaipur than in Tier 2 cities.
 The panelists concluded that Grade A commercial office space was still not available in India.
 They felt that premium office space does command a premium that tenants would be willing to
pay if the development is of the expected quality.
 Even though current commercial office space was experiencing high vacancy rates, the panelists
were optimistic about the future of commercial office space in the country.
RIDING THE TIDE – next wave of real estate investments in India?

Affordable housing:

 Seems to be the buzzword of the industry. A lot of developers have not understood the
dynamics of affordable housing.
 Affordable housing is not just about low price. No point is offering a low price product that is in
an undesirable location.

Mid-market Housing:

 A lot of potential especially in Tier 1 and Tier 2 cities.

 Very important to better understand consumer preferences in mid-market housing. For
example, in a market like Bangalore, a customer has a variety in choice due to a supply whereas
in Mumbai, a customer does not have much choice. This is leading to better quality offerings in
Bangalore.

‘A’ Grade Commercial Space:

 No ‘A’ grade commercial space available in the country today.

 Developers not too keen on ‘A’ grade commercial space because they feel that a justifiable
premium cannot be charged for a higher quality product.

Hospitality:

 A lot of announced hospitality projects have not yet seen light.

 Investors are not comfortable with this asset class because it is very difficult to exit.

Retail:

 The general opinion about retail as a real estate asset class is not optimistic.
 Problems with underwriting because there are no comparable benchmarks.
 Very few successful malls in India.
 The cost of land in India is very high which forces developers to exploit maximum FSI available.
This leads to multi-floor malls which are very common in India. However, most successfully retail
mall models from around the world usually are no more than two floors.

 Immaterial of asset class – QUALITY is the new wave of investment in India.

 As consumers are well travelled they are beginning to demand better quality products.
 Quality is demand led and will definitely improve as competition increases amongst real
estate developers.
SLUM REDEVELOPMENT SCHEMES – good cause or good business?

 SRA has received over 1400 proposals till date affecting 1-2 million households.
 Average family size in the slums is 5-6 members.
 From an investor perspective there is a lot of apprehension regarding investments in slums.
 SRA is involved in redevelopments across Mumbai from South to Central to North.
 Total sellable area under redevelopment schemes should be around 33 million sq ft.
 A real estate developer involved in redevelopment schemes typically looks at an investment of
INR 150cr expecting a return of INR 400-500cr in 2-3 years.
 Redevelopment schemes look good at the outset considering land cost is zero and anticipation
to sell is at least INR 15000/sq. ft.
 Why are investors wary of putting in money even though upfront money is not required in terms
of land acquisition costs? Because approvals are required every step of the way. Also there is a
huge dependency on slum residents. Coming in as an investor on Day 1 is when the risks are the
least. But what is worth realizing also is that financial returns are huge as the risk is substantial
as well and FDI funds are not comfortable taking these risks. Also, gestation period is very long
and that causes additional apprehension.
 A successful example is of Tata’s redeveloping a slum in Chembur using TISS’s help to do basic
research and convince slum dwellers of the benefits of redevelopment.
 Another successful case is also of Netaiji nagar in Pune where the developer and design team
worked in tandem in 2005.
 Key takeaway is Gunman approach does not work.
 Benefit from slum redevelopment is that a number of slums in Mumbai are in prime locations in
Mumbai and therefore a developer can get substantial publicity when executing projects like
these in those locations.
 Is there a reputational risk? Delhi developers do not want to enter this market as most people
would prefer catering to the luxury segment for real estate developments. Also, there is too
much political risk. So essentially brand and political risks.
 International investors have the following reservations-
o No clarity on kickbacks and bribery
o Negative press that they will receive in the international markets
 As societies have matured, reputational risks have gone down and media and activist hype has
also gone down.
 Tata group setup a labor colony in Chennai and assured its laborers pucca houses, 3 meals a day
and day care for kids. This enabled the workers to be highly efficient and so a project that was
slated to get done in 4 years was done in 10 months.
 Tata group concentrates on socio economic welfare and has also looked at providing vocational
training to eligible people. They are making an attempt at financial inclusion in its true sense.
 Even under redevelopment scheme, 30-35% people end up selling property. Remaining 60-65%
people are willing to lead a better life. Therefore aggregate number of slum dwellers is
decreasing.
  To ensure all around development Noida government ensures that money coming from Real
Estate and Infrastructure development get pumped into external infrastructure.

RESIDENTIAL / AFFORDABLE HOUSING


 The decision kicked off with formal introductions of participants and co chairs.
 Dilip Barot and Sujal Shroff took the lead and the discussion kicked off with an attempt to
define Affordable Housing. Participants be had various views and the consensus was that
there was no real formal definition of Affordable housing as what may seem affordable in
Mumbai may be premium in another part of India.
 Most participants agreed that a model which was priced at 50% of the EMI that the people
in and around the locality pay could be a fair definition for affordable housing.
 Participants also concurred that affordable housing was not everyone’s game and for
projects to be successfully implemented government support in terms of benefits, stable
and realistic policies and firm development plans is critical.
 Developers who have taken to affordable housing projects need to play volume games for
the projects to be profitable
 Developers had concerns that the areas in which they can potentially have affordable
housing projects often lack other basic infrastructure like roads and power which hampers
the attractiveness and viability of them taking up such projects
 Some developers also discussed the potential of groups of developers combining forces to
offer value packages to state governments in order to get their support in local land
acquisition, infrastructure development, obtaining permits and clearances.
 The discussion ended with Sujal Shroff agreeing to work with local developers and the MCHI
to initiate discussions with state governments on the concerns of builders and to work on a
model which will incentivize the state governments to approach groups of developers who
have teamed to deliver effective low cost housing projects

SEZ
 The discussion group here was rather small with just 7 participants
 Discussion centred around the various SEZ frameworks available and the current policy
challenges that affect the set up and development of these SEZs
 As per the developers, the government has not been very fluid and forward thinking in
creating the framework for these SEZ models
 Labour policies developed for these SEZs are not in line with the ideal business models the
SEZ unit owners would like to have
 Availability of skilled and unskilled labour is another challenge that SEZ units face regularly
 IT SEZs are the most common and easiest setups available to developers
 Developers also believed the governments should better incentivize business owners who
set up in SEZs and developers who undertake SEZ projects
 Developers believed that given the current state of uncertainty in policies and political
setup, it was very hard to entice foreign investments into SEZs
 A gentleman gave an example of how his foreign investor’s investment went bust overnight
when the local government tweaked some land rules to favor one of their corporate
sponsors.
The discussion ended with an general consensus that unless significant policy changes are
brought about, attracting foreign investments to SEZs may not be sustainable in the long run.

INDIA REAL ESTATE FRAMEWORK – how much improvement, how far to go?

 The discussion kick started with an important question “Is there a real estate framework
in India at all?”
 Developers and investors spoke of erratic government policies which affect investments
and development plans
 A participant quoted an example of the Karnataka government mandating helipads on
buildings above a certain height to enable smooth safety operations and the irony was
that none of their local teams (fire/police etc) even had a chopper!
 Everyone agreed that the bare minimum the government must do is have clear concise
policies which do not leave any room for interpretation
 Developers conceded that they did not mind working under the existing policies as long
as the policies were the same for each and every one of them
 Developers also brought out the regular hassle of getting clearances and permits from
local authorities. These processes delayed projects and in effect increased project costs
which were then passed on to the customer and in the long to medium turn caused the
market prices to see unusual and unnecessary jumps
 Common on the wish list of all participants was a framework that allowed for single
window clearance, speedy time defined responses from government bodies for
clearances and permits, better coordination between the centre and the state on
policies that affected the centre, better foreign investment regulations and most
importantly stable non arbitrary regulations.

REAL ESTATE FINANCING - Debt or Equity

 It began with the Introduction of the members in the hall. Everyone in the hall was in
consensus that the Debt or Equity financing depends on the “state of the market”. Most
of the discussion left the developers and the Investors polarized on their opinions.
 The Private equity players said that they are looking only at “Debt” in the current
scenario as it is difficult for Developers and Investors to agree on the valuations.
 Speakers have touched upon the changes that occurred since October 08 viz. Investors
are back to buying with cushion and lot of corporate have come up with what is called
“Treasury cell for liquidity management”.
 The biggest question everyone raised was “How does one price Equity”. Everyone
seemed to be in agreement with a blended structure of Debt-Equity.
 One allegation that Investors had was that developers offer the same return on Debt
and Equity.
 Developers were clear in saying that they need money at the stage of buying land and
not during development of the property.
 Capital allocation is done on “risk-reward basis”. Developers were of the opinion that fair
amount of capital is still coming in. The foreign capital has dwindled but capital from within
India is still there
 The solution offered was for the investors and developers to share the same “Risk level”
 Investors were of the opinion that Indian Developers ask for sweat equity, which at times
complicates the deal.
 As the banking sector growth in India is at 20%, the availability of debt is at peak for
developers.
 Private equity players were of the impression that as the land prices are high it is tough for
them to commit equity at the land acquisition time.
 Typical Land purchase payments happen in 30-45 days, so that is the ideal time frame in
which the FDI or the Private Equity investors should be able to fund the Developer. The
question of the hour is whether they can do it or not?
 Private equity investors expressed their concerns over funding at the stage of land
acquisition for the reasons such as zoning changes that are common in India and inordinate
delays in obtaining permissions.
 They also touched upon redeveloping old buildings, where the problem was the amount of
time developers take in vacating the tenants living in those buildings. (typically in the range
of 2-3 years for 200 family dwelling complex)
 Another interesting point brought up by developers was that “Debt with collateral and
primary security” is costlier than equity if one counts the interest lost on the collateral.
 Most agreed that 30-40% equity with a structured debt is a better option that works well for
both developers and investors.
 Investors also suggested developers to cash out on the old project before its completion by
discounting the future cash flows to finance developer’s future project land acquisitions.
This process indirectly helps them in financing huge projects in the stage of land acquisition.

GREEN AND INTELLIGENT BUILDINGS – competitive advantage of just costs?

 The discussion began with the introduction of some Green building accreditations like LEED,
BRIAM, TERI, ECBC, GREEN GLOBE, and SPHERE.
 LEED cannot be applied directly to Indian context because of the differences we have in
geographical distances between the construction sites and the manufacturers of
construction material. E.g. in USA the maximum distance allowed between construction site
and manufacturing plant to get certified by LEED is 500 miles.
 International consumers pay a premium for the LEED certified buildings but Indian
consumers are still not ready to shell out money for the LEED certified buildings.
 Growing vegetables in the backyard, recycling waste within the site by using compactors,
rainwater harvesting, usage of solar power and using fly ash bricks are some critical aspects
of Green building certification.
 Indians started paying for Organic foods but paying for Green houses hasn’t yet been the
trend. For us to achieve this we have to educate people and offer incentives to developers
building green houses
 LEED Certification costs around Rs. 250-300 thousands and this is a huge capital expenditure
for a small to medium size developer.
 The green building concepts though increase you capital expenditure they compensate the
developers by decreasing costs of his operations.
 Indian buildings are considered mostly green as our construction sites are close to the
manufacturing plants, most of our cement bags are sent for recycling and most of us use
solar water heaters.
 Green is a concept that shouldn’t just be restricted to construction instead it should be
applied to the management of buildings too. The ideal way of bringing about this change is
by changing the mindset of the people.
 Compactor that is constructed to manage waste saves a lot of money in the future
operations of the building because the transportation of waste involves 80% air
transportation.
 A novel thought that was brought into the discussion was to introduce green building
concepts into Indian consumer mind through some Indian ways instead of simply copying
the entire branding concept from the western countries.

UNLOCKING ASSETS - how and when will the game become interesting?
 Discussion began with people throwing numbers on how much FDI did India receive for
investments in Real estate. DIPP website quotes it to be 8-9 billions.
 Speakers were of the impression that the foreign investors were too bullish when they came
to India in 2006-07. They probably invested in a lot of properties in which they shouldn’t
have invested, a decision that we could come up with thinking retrospectively. This is one of
the prime reasons why the returns on real estate investments for foreign investors are not
looking attractive.
 Looking at the whole gamut of investments made in the last few years members were in
agreement that more investors burnt their fingers than people who exited. There are few
players who exited but most of them were forced exits as the future to them didn’t look
profitable. To quote a number, 1.1 billion went out in the last 9 months. Most of this was in
the “Residential space”. How profitable were these exits is the vital question to be put here.
 Another important point that was brought up was that the Indian investors were able to see
through the developers and properties to choose the right investments that are giving them
good returns
 Even today, Asian markets are still perceived to be risky when you compare them with the
American and the European Real estate markets.
 Raise in rentals both in the commercial and the residential spaces signals the next move for
Indian Real Estate market.
 Discussion went on to touch upon REIT’s, Warehousing, SEZ’s, HNI’s and Strata sales.
 Members were of the belief that India needs a secondary market for REIT’s and they also
shared a common view that Indian Government is tough on Real Estate developers looking
for foreign capital.
 Members believed in the capital that could be raised within India and were quoting
examples of Blackstone and KKR raising funds in china that could also be replicated in India.
 Both survival and growth of Real Estate sector in India are possible even without FDI’s but
FDI’s would definitely help in pushing local investors to go bullish on Real Estate.
 Raising money in the domestic route, regulatory reforms, treating foreign managers in a
better way and foreign fund managers raising capital in India are the key steps suggested by
speakers while summarizing the discussion.
 Conclusion was drawn saying that “we need more success stories to attract more foreign
investments”.

MONEY FOR DEVELOPERS - what options are viable?

 NBFC’s and Bank loans with collaterals are still the most common ways in which Developers
get funded in India. The difficulty with this is that it is a debt funding and the fund comes in
only at the time of construction and doesn’t help during land acquisition.
 The property prices across India were compared and the picture clearly pointed that the
prices in Mumbai and Delhi are raising to levels where they need some correction whereas
Bangalore and Hyderabad are still not catching up with other cities and are not doing as well
as they did prior to 2007.
 Joint Development Agreement model, where the developer gets in agreement with the land
owner is still the preferred model for Real estate developers. Few suggestions provided here
were to fix on to your decisions and do not change them as you move forward.
 In bigger land developments, developing in a phase-wise manner is advantageous to
developing the entire land in single phase. The amount of risk for the developers doesn’t
directly correlate to the size of the project under development.
 The discussion went on to highlight the differences between a Real Estate Developer and a
Contractor. The critical one was that a real estate developer “thinks and plans on the move”,
he is creative and comes up with as many ideas as possible for the same work scrapping all
his old ideas whereas a contractor simply does what he is asked to do.
 One of the members gave out numbers on number of PE investors who ventured into India
in the last 5 years. This number was close to 300 in 2007. Today this number has come down
to 120.
 INDIA – WHAT’S THE REAL STATE OF REAL ESTATE?

In order to evaluate this, we need to look at the following 3 aspects:

- Supply and Demand
- Financing
- Developer and investor risk

 Supply
 Depends on which micro market we are looking at.
 Long-term perspective: Can current supply of real estate keep pace with growth in
India? The answer is, in the Residential sector more supply is required. So is the case in
the IT sector. However in the Commercial sector outside of IT, there is an over supply at
this point in time.
 Demand
 What drives residential demand? It is difficult to answer that question in India as there is
no straight answer between investor and user demand.
 Some people were of the opinion that there is a severe lack of Grade A office spaces in
India and developers should concentrate on that.
 In the Indian context, a distinct difference lies between investors and speculators. While
the former look at real estate investments with at least a 2 year investment period, the
later look at executing short term trades.
 There is likelihood that housing/mortgage numbers will go by 10-15% in value terms.
 In the past couple of months enquiries related to office space have grown significantly.
 In India, companies performing back office operations do not require Grade A offices.
Grade A offices are primarily required for front office spaces like in BKC, Mumbai and
CP, Delhi.
 Indian Grade A office space quality is much different from US Grade A office space
quality.
 Current Grade A spaces needs to shift focus on how they will fare on this scale in 5-10
years.
 Architects provide perspective on what is happening globally but at the end of the day,
it is the local market expectations that supersede all other projections.
 View also is that iconic buildings are being constructed because of oversupply and this is
their attempt to stand out.
 In India, if investors are willing to wait then they will definitely get returns.
 It is also very important to differentiate between PE and HNI investors.
 The question also arises if PE firms are really required in this sector? Answer lies in the amount
of land cost a developer shells out for a project. For larger investments, PE firms are required.
 Current real estate PE investment in India is just 10% of the total yearly real estate investments.
Projections however is that in the long term PE players will become more relevant.
 Average growth in real estate across Tier 1, 2 and 3 cities is expected to be 30-35% CAGR in the
long term.
 Current HNI investments are primarily in Senior secured positions.
 If any one of the investments goes bust, HNIs will disappear.
 Cost of funds from HNIs is less that cost of funds from PE investors.
 From Tier 4, 5 cities, average return on real estate investments is at least 18-20%. There is HNI
backing in these tiers but no PE because of lack of transparency.
 Another observed trend is that office spaces that are less than 3000 sq. ft. are selling fast
whereas 10000+ sq. ft. office space sales are stalling.
 When a PE firm is evaluating in investing in a project, they look for a successful track record of
the developer. They prefer developers who have been around in the market for at least 15
years. Also, they concentrate on on-time deliveries for relatively newer developers.
 Buyer fear creates premium pricing in India.
 Transparency will also be an issue in real estate deals in India.
 From a developer’s perspective, in the short term residential mid-market look attractive
whereas in the long term commercial and retail asset classes appear to be great investments.
Developers preferred mode of finance is debt.
 From a PE investors perspective, biggest risks and challenges in India lie in
o Execution
o Choosing the right partners
o Regulatory risks
o CDOs as a form of capital
HOTEL DEVELOPMENT TRENDS – luxury, mid class or budget?

 Challenge with this asset class is that payback periods are much longer.
 While a residential project requires only 12 statutory approvals after the land has been
purchased, a corresponding hotel project requires a staggering 40 approvals.
 While constructing hotels, the following 3 factors should always be kept in mind:
o Segment that is being targeted
o Location
o Sub-segment that is being targeted
 While industry average says that 40% of land cost is the project cost, more realistic estimates
lean toward 15-35% of the land cost as an estimate for the project cost.
 It makes sense to get into the hotel sector only if one is looking at a long term investment.
 For this particular asset class a significant amount of funding is available in the form of debt and
not much from PE is available
 Also in case of debt form of financing, banks are seen to be more comfortable financing mid-
segment hotels.
 In the current context, ECBs are also available as financing for established players at LIBOR+5.5-
6% which can be hedged. These are typically available with a 4 year moratorium period and 7
year repayment schedule and are available for up to the entire cost of construction sans the
land costs.
 Indian banks do not lend below 10-12% rate of interest.
 Under management contract for an international giant like Hilton, managing less than 100 keys
per hotel leads to viability issues as economies of scale are not exploited.
 Also seen is a shifting trend toward 3rd party independent operator for hotels. Even international
chains once well established intend to involve more local operators. Example of this is Radisson
in Malad, Mumbai where RIMC is an operator.
 Success of a hotel depends primarily on its operations and timing of entry into a market.
 Shifting trend noticed toward building locally built villas which are sold to people on a lease
basis. Banyan Tree is trying to execute this in Cochin, Kerala.
 F&B revenues are also vaguely tied with the star rating of a hotel. Tier 2 and 3 cities are
expected to see F&B revenues accounting for at least 30%.
 As per HVS, while room supply has grown by 35% when comparing third quarter 2010 with third
quarter 2009, demand has also grown by 25-30%. However occupancy has declines as supply of
rooms still continues to be greater than demand PAN India.
 Of the upcoming projects, 70% of the supply is expected to be seen in budget and mid-market
hotels.
RETAIL DEVELOPMENTS – what lessons from the past?

 India’s retail sector has evolved from Palika Bazar, New Delhi to Select City Walk, New Delhi.
 Prozone is launching the first phase of India's largest and first horizontally designed shopping
mall spread over 1 million sq ft area, housing a mall, hotel and office blocks in Aurangabad on
October 8 2010. Subsequent plans of expansion include moving to cities like Nagpur and
Coimbatore.
 Retail investments work from a long term yield standpoint and are mostly debt serviced.
Typically a mall stabilizes only in 3-4 years.
 Increasing trend in procuring sites that are larger than mall requirement and then using a part of
it for residential buildings. This way investors are able to hedge their risks. Example is Prozone’s
site coming up in Nagpur where total area is 41000 sq. ft. of which 22000 sq. ft. will be used for
residential buildings.
 Construction in the retail sector works horizontally and not vertically as in regular residential
setup.
 Building parking lots is immensely expensive and is considered the next big thing.
 Infrastructure requirements are a huge challenge in this sector.
 Prozone’s philosophy is that they would like to be a dominant player in this sector and so they
are not into corner malls.
 Dominance is not just a function of square foot area but also a function of the merchandizing
mix offered.
 For example while Pune has a population of 5.5million it has 25 malls and a slightly smaller city
like Aurangabad with a population of 3million has only 1 mall.
 Inorbit mall in Navi Mumbai, Maharashtra is also an example where dominance was created by
the mix of stores offered.
 Zoning in malls should be a huge priority.
 Earlier developers were charging rentals from retailers whether retailers made money or not.
However today this works on a profit sharing basis with a minimum guarantee.
 In India, two anchors of the same state can exist in the same site.
 Entertainment zones are considered to be loss leaders because of the space occupied.
 Lack of vanilla retailers in India is a big issue.
 Increasingly it is becoming easier to get anchors into a mall but full occupancy is a concern.
 Inorbit seems to have taken a bottom up approach while trying to figure out the optimal square
footage of their malls. They probably started with how much retailers are typically willing to pay
for rentals and determined ideal sizing of mall accordingly.
 If mall site works well then vanilla stores automatically work well.
 Single brands would prefer entering Indian markets at 100% ownership however cost of
entering India is huge. In India, only if a brand has around 50 stores across India does it make
sense to manufacture in India. This is a huge deterrent for mid-size international players to
enter Indian markets.
 Special facility management firms called Mall management firms are best suited to operate
malls. Simply being a facility management firm does not help.
 Firms such as TecnoPak, JLL publish data on demand drivers for cities across India. However
telecom industry numbers seem to be quite a good representative to estimate this too.
 A mall needs to be sized appropriately. If it is too large, then once might not be able to find
enough retailers and subsequently customers. If it is too small then excessive demand can be an
overkill.
 In terms of tenants, a mix of big international retailers and local brands is always ideal.
 With FDI investments the challenge in India is how to go below 500K.
 Entertainment (F&B and Theatres) in malls account for 20-25% of area usage these days.
 Sales density is a very important factor that needs to be factored in while sizing stores. A bottom
up approach to calculate rental on approximate sales per store is ideal.
 Apart from minimum rental from retailers, the following profit sharing model seems to be the
norm:
o Hypermarket - 3%
o Department stores – 8%
o Vanilla stores – 12-15%
o Jewelry and similar higher end stores – 20%
Some malls even go with higher of the two numbers.
 Increasingly contracts specify that if a retailer is underperforming on sales he can be moved to
another location to improve zoning.
 Airport retail tenants are very different from mall retail tenants.