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The retail real estate sector in India's top seven cities has faced a 2% contraction, as reported by property consultancy JLL. This contraction is evident in the operational retail space, which dwindled from 90.6 million sq ft in June 2022 to 89.2 million sq ft in June 2023. During this period, approximately 4 million sq ft of organized shopping malls either underwent downgrades or closures. On the brighter side, 2.63 million sq ft of new mall space was introduced.
Operational retail spaces, as specified by the report, denote actively functioning shopping malls. These retail spaces are dispersed across Delhi NCR, Mumbai, Pune, Bengaluru, Kolkata, Chennai, and Hyderabad, amounting to 89 million sq ft in the first half of 2023. Notably, Delhi NCR and Mumbai jointly contribute over 50% of this operational mall stock, boasting 28 million sq ft and 17 million sq ft, respectively. The report observed the completion of around 1.1 million sq ft of mall space during the first half of 2023, with additions primarily in Hyderabad and Delhi NCR.
Despite this recent decline, the report anticipates a robust 43% expansion in shopping mall stock, projecting it to reach 127 million sq ft by the conclusion of 2027. This growth is expected to be propelled by factors such as heightened consumer demand and planned mall developments.
The advent of India's inaugural retail Real Estate Investment Trust (REIT), the Nexus Select Trust REIT, bolstered by Blackstone, has paved the way for retail investors to engage in the retail asset class. At present, Nexus REIT encompasses roughly 9.9 million sq ft of retail space, promising significant potential of 43-44 million sq ft of REIT-worthy retail assets across diverse cities. Remarkably, over half of these assets are concentrated in the Mumbai and Delhi NCR regions.
The report foresees continued heightened institutional investment in the Indian retail sector due to a robust supply pipeline and fresh mall announcements from established developers. While tier I cities still command substantial investor attention, a noteworthy 30% of institutionally held assets are nestled in tier II and tier III cities spanning India. These cities encompass Amritsar, Chandigarh, Ludhiana, and Mohali in the north; Mysuru and Mangaluru in the south; Surat in the west; Bhubaneswar in the east; and Indore and Nagpur in central India.
Retail assets deemed suitable for REITs are mandated to meet specific criteria, including classification as 'superior' and 'good' organized malls, boasting a leasable area of at least 100,000 sq ft and current vacancy rates of less than 20% as of June 2023. Malls are further categorized as 'superior,' 'good,' or 'average' based on tenant mix, quality of mall management, amenities, vacancy levels, and ownership patterns.
Furthermore, the report underscores a noteworthy trend wherein 24 new international brands have entered the Indian market since 2021. These brands have exhibited a distinct inclination toward high-quality mall developments in gateway cities such as Delhi NCR, Mumbai, and Bengaluru. Intriguingly, nearly a quarter of these new entrants operate in the food and beverages (F&B) category.
Regarding leasing activity, gross leasing across the top seven cities, spanning shopping malls and prominent high streets, reached a substantial 3.16 million sq ft in the first half of 2023. This underscores the translation of consumer confidence into active retail expansion. Notably, Bengaluru led the way with a 34% share of leasing activity, closely trailed by Delhi NCR (23%) and Hyderabad (19%). Leasing activity during H1 2023 was prominently driven by fashion and apparel brands, alongside F&B establishments.
Emerging retail formats in India's retail sector include premium outlet centres and highway retailing. Premium outlet centres, although in their nascent stages in India, are leveraging the evolving lifestyles and aspirations of young, affluent, and well-travelled consumers. Meanwhile, highway retailing is poised for significant growth due to infrastructure development and heightened leisure travel. The government's promotion of electric vehicles (EVs) is anticipated to result in the establishment of EV charging stations along highways, enticing support retail segments like quick-service restaurants (QSRs) and convenience stores.
Moreover, entertainment is swiftly gaining traction in highway retail, catering to family and group travellers. The escalating demand for global brands in highway retail is expected to beckon retailers with international pedigrees to venture into this burgeoning retail segment.
In summation, while the retail real estate sector in India's top cities recently experienced operational mall space contraction, it is primed for robust expansion. This expansion is expected to be fuelled by heightened consumer demand, planned developments, the emergence of retail REITs, and the influx of international brands. Furthermore, the emergence of evolving retail formats like premium outlets and highway retailing is set to reshape India's retail landscape in the forthcoming years.
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