The real estate sector has been in doldrums for some time now, but the pain was largely restricted to the residential segment. Excess inventory in luxury housing, unwillingness on the part of developers to bring down property prices and falling demand were some issues plaguing this space. But commercial real estate, which comprises construction and renting of office space, hotels and malls, has shown steady growth in recent times.
While new residential launches were down 41 per cent y-o-y in the second half of 2017, commercial space saw 3 per cent rental growth in the same period. Hyderabad and Bengaluru recorded the strongest upswing of 8.5 per cent and 9 per cent respectively. Higher transparency in the commercial segment, coupled with the presence of informed buyers, has boosted rental income growth.
Almost all the listed companies have a presence in commercial real estate, though most players are predominantly in residential. Their operations in the steadily growing commercial space have cushioned their earnings when demand in the residential market took a hit.
Growth drivers
According to CII and JLL reports on the retail segment of real estate, rental income grew at the fastest pace in Delhi (2.03 per cent y-o-y) and Mumbai (2.28 per cent) in the September 2017 quarter. Increasing demand for renting outlets in malls is reflected in the falling mall vacancies in recent months. In the September 2017 quarter, Chennai, Bengaluru and Hyderabad reported the lowest average mall vacancies since 2011.
The increasing urban demand for branded goods and inclusion of multiplexes have made this segment lucrative for realty players, particularly in cities such as New Delhi, Bengaluru and Mumbai. Large players, such as DLF and Unitech, made the most of this trend early on by establishing malls in prime areas of these metro cities.
According to the JLL report, the demand and supply outlook for malls seems steady, with untapped potential for realty players. In cities such as Mumbai, the supply of retail space is expected to increase around 3.6 million square feet between the fourth quarter of 2017 and Q4 of 2021, and 3 million sq ft of that space is expected to be absorbed. On the other hand, in cities such as Jaipur the total stock of retail space is 4.5 million square feet and the upcoming supply (between Q4 of 2017 to Q4 of 2021) is 0.45 million square feet.
Rapid development of urban infrastructure has led to demand for high-end facilities. For instance, in the Eastern Metropolitan bypass in Kolkata, one of the important economic hubs in the State, a wave of upmarket properties providing luxury amenities for customers is emerging. Along with infinity pools, built-in Jacuzzis, sports and health related facilities, malls are also mushrooming here.
Companies see opportunity in retail
Listed real estate companies are also quick to spot opportunities in this space.
Phoenix Mills, one of the large players with a dominant retail presence, has established eight malls across major cities. Nearly 65 per cent of the company’s revenue comes from its retail assets, 17 per cent from hospitality (hotels), 13 per cent from residential and only 4 per cent from commercial (office space). The company has retail projects under construction in Bengaluru and Chennai.
Other realty players have already branched out into the retail real estate segment, though their primary business is in the residential space.
Consider Brigade Enterprises. Retail contributes about 14 per cent of its revenue while nearly 75 per cent comes from housing. Among the total project area under construction, 31 per cent is for retail. Brigade’s Orion Mall in Bengaluru was almost completely leased out as of December 2017.
Growing demand
Companies such as Omaxe and Indiabulls are also planning to start new retail projects, given the growing demand.
Oberoi Realty, a major player in Mumbai, has established its retail business in the suburbs, gaining a leadership position for its mall in Goregaon, which generated revenue of over 13 per cent y-o-y for the March quarter of 2018 and the occupancy is about 99.4 per cent. However, Oberoi Realty too derives maximum revenue from its residential spaces.
With the Centre planning to develop infrastructure in multiple cities, the scope for retail business operations is likely to increase. Real estate players may, therefore, gain from investing in viable retail projects.