The sight of a construction crane looming on the horizon has become ubiquitous in most large cities across India ? and may become even more so in the near future.
The introduction of large foreign retailers like Wal-Mart into the country is eagerly awaited by many industrialists, particularly in the real estate sector, where builders and developers hope to benefit from an increased demand for retail spaces.
Commercial real estate prices in India have already risen sharply in big cities in recent years, and there is a dearth of quality retail spaces available for rent, so analysts expect a boom in construction if foreign multibrand retailers enter the market.
That looks likely: On Wednesday, India?s Lok Sabha, or lower house of Parliament, voted against a measure forbidding foreign multibrand retailers from entering India. The upper house of Parliament also voted against the measure on Friday, cementing support for new retailers. State governments have the option to ban big foreign retailers from their state, and their entry into the country comes with several conditions, but builders are already getting excited.
?Foreign retailers are most welcome by the builders community,? said Anand Gupta, the general secretary of the Builders? Association of India and managing director and chairman of the Choudhary & Choudhary Group, a construction company working primarily in Mumbai and Pune. ?There is a lack of financial support from the government for real estate,? he said, and an entry of foreign companies ?will help financially and boost the demand for commercial establishments and shopping centers.?
While foreign retailers are allowed to procure land in India, as long as they build their own stores on it, they are not allowed to buy and sell undeveloped land, and they face other regulations on development set by the Department of Industrial Policy and Promotion of the Ministry of Commerce and Industry.
Therefore, most retailers prefer to lease properties. ?The rental model tends to work out better for profitability,? said Subhasis Roy, the national director for retail agency at Knight Frank India, a real estate company.
In Indian cities with more than a million people, which big foreign retailers are confined to, analysts predict a marked increase in demand for commercial real estate, warehousing and office space. ?In the short term there will be a spurt in demand as retailers set up test stores,? said Harvesp Mehta, director for real estate at Motilal Oswal Private Equity Advisors. ?Developers in cities like Mumbai do not have sufficient demand coming in, so it will bode well for them if there are new entrants to the market.?
Whether this will translate into sustained demand in the long term depends on whether these companies are able to overcome infrastructural hurdles and fare well in the Indian market, he said.
The paucity of quality rental spaces for the retail sector in the cities where multibrand foreign retailers are expected to enter the market could trigger demand for new projects. ?In India, per capita mall space among the top seven metro cities is presently estimated at less than one square foot, with the United States and Europe average being 20 to 40 times that,? said Mr. Roy. While there are several malls in the works, most won?t be finished for three to four years, he said.
However, some say a large increase in retail rents does not seem viable, with the prices of real estate in India?s biggest metropolitan areas already being unaffordable to many. ?There is only a marginal jump in pricing possible, beyond which it will become a barrier to entry,? said Pankaj Renjhen, managing director for real estate services at Jones Lang LaSalle India. ?While it is difficult to compare India to other markets because the industry is structured differently, prime locations in India are some of the most expensive in the world.?
In premium malls that house international brands, like the Palladium in Mumbai, the DLF Emporio in Gurgaon or Select Citywalk in New Delhi, rentals vary from 350 to 600 rupees ($6.44 to $11) per square foot per month depending on the location, the brand and other variables, he said.
Mr. Mehta said, ?If the prices go up anymore from here they will kill demand the way they did in the residential real estate market. I?m sure McDonald?s would like to have a store in every corner in a city as populated as Mumbai, but they have been forced to slow down the process of opening stores because the rentals are crazy.?
Indian retail space may be getting more expensive, but it is still lower than prime retail space in some other big cities. In Manhattan, for example, retail rents on Fifth Avenue below 49th street averaged $875 per square foot a year, or $72.92 per square foot a month, according to a report from Cushman and Wakefield.
However, for companies in the Indian retail market, rental costs are a higher percentage of their turnover. While rentals are typically 3 percent of the turnover of retail companies internationally, they are well over 10 percent of turnover in India, said Mr. Roy.
International brands will have to come in with realistic expectations about where they can set up shop, analysts said.
?No quality real estate will be readily available. They will have to build it from scratch and even then it will lack the surrounding infrastructure like connectivity, parking space, water and electricity,? said Mr. Renjhen. ?International brands cannot come in expecting the same quality of real estate that they are used to in Europe or America. Here, a high-end luxury retailer will have to be okay being next door to a neighborhood chemist.?
This post has been revised to reflect the following correction:
Correction: December 11, 2012
An earlier version of this article mistakenly compared Manhattan rents reported on a yearly price per square foot to Indian rents reported on a monthly price per square foot.
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