The Indian government’s recent decision to allow foreign direct investment (FDI) up to 51% in multi-brand retail has been received with much optimism and some apprehension by the country’s real estate sector. Before we can analyse the potential impact of FDI in multi-brand retail, it is important to reflect on some of the important features of the policy.
The news of FDI in multi-brand retail brought smiles to developers of mall spaces all over the country. According to most of the developers, the new policy will have a two-fold impact on the Indian real estate sector: (1) it will increase demand for anchor space in cities with a population of 1 million-plus where the state governments agree to permit foreign retailers; and (2) rental price expectations will rise as not much quality space suitable for big-box retail would be available.
Room to grow
In India, per capita mall space in the seven largest cities is estimated at less than a square foot, with US and European averages being 20-40 times that of India. Steady GDP growth and a young population with more disposable income could attract investment for mall development in India. The comparatively low square footage and the steady increase in rental prices due to shortage of available quality retail space could trigger new projects.
FDI in multi-brand retail will help the country’s real estate sector as the move will create demand for retail space and boost mall development. The retail real estate industry will benefit immensely because of the increase in demand and investor confidence. One can also expect an increase in transparency in retail real estate, on similar lines as commercial real estate. Additionally, the country will gain significantly in terms of quality standards and consumer expectations, since the inflow of FDI into retail is bound to pull up the quality standards and cost-competitiveness of Indian producers in all segments.
A key differentiator of the retail sector is that it penetrates beyond the top seven cities, into areas where there is a significant shortage of well-planned, well-developed and professionally managed shopping centres. With FDI, the organized retail real estate market will spread more uniformly and more lucratively for all concerned. The government’s move will open up lucrative opportunities not only for builders and developers but also for investors. The decision will also create huge employment openings.
While real estate companies, which were reeling under the impact of the economic slowdown, will see a revival in demand following the FDI approval and are likely to bag deals from foreign retailers, leading developers such as Unitech, DLF and Sobha Developers are likely to be the biggest gainers.
Though FDI in multi-brand retail is a win-win move in all respects, costs remain a challenge. The main ingredient of real estate costs is land, the price of which is stable and appreciating in most markets. This needs to be coupled with the cost of construction and cost of capital. The retail real estate sector also faces a challenge by alternative and much more lucrative investment opportunities in the form of residential projects, supported by stronger-than-expected demand for retail brought on by the easing of FDI norms, which may accelerate land prices and the cost of space in shopping centres.
Indian real estate developers welcomed the policy announcement as a move in the right direction, saying it will give a new fillip to the development of the retail sector, with a majority of the FDI likely to be allocated for the creation of back-end infrastructure, such as processing, manufacturing, logistics, storage and warehouses. In addition to increasing demand for real estate, they expect FDI to create jobs across the country and check the large-scale migration of people. However, certain other segments are apprehensive and do not expect foreign retailers to rush to India due to the all-round slowdown in the economy. Therefore, it is difficult to assess how many foreign retailers will come and even in the case of some uptick in demand for retail real estate, it will take six to 12 months to assess the impact of the government’s decision.
To conclude, a development that is perceived to be a game changer for the retail business in India will depend a lot on retailers’ adaptation to local tastes and preferences.
“Better late than never” describes the government’s much-awaited FDI policy for multi-brand retail and now the reaction of global retailers is awaited. Despite the optimistic views of commercial property developers and the government’s bold stand on the issue, it will be necessary for the big international retailers take an interest and invest in establishing their stores in India.
Utkarsh Tewari is a partner at Mine & Young, where Akanksha Singh is an associate.
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