Of the over US$1.57 billion of investment registered in retail real estate sector between 2015 and Q3 2017, more than half went into non-metro cities. This includes entity-level deals, platform deals and acquisition of stakes in malls. Some of the global private equity funds have been investing in the retail real estate sector to diversify their investment portfolios in India.

 These are Tier 2 and Tier 3 cities which have investment-grade retail assets with the potential of generating good returns for investors after they are refurbished or upgraded into superior quality malls. Apart from Mumbai, investment largely took place in cities such as Pune, Bangalore, Amritsar, Indore, Ahmedabad and Chandigarh.

In some cases, investors intend to improve properties through various value-adding initiatives. This can be done by altering the tenant mix, adding hot retail categories and upgrading the food and beverage (F&B) offerings. It is now recognised that improving a mall’s F&B, entertainment and leisure component induces ‘placemaking’, generates more footfalls and increase dwell time – thereby helping retailers to boost their sales.

In cognizance of this, retail space investors are undertaking the necessary upgradation steps after acquiring the right retail assets. Interestingly, such investors are opting for both new mall projects as well as operational ones. The proportion of investment has been quite high in case of latter; however, in the last 12-15 months, private equity funds have been committing to acquiring and developing greenfield retail real estate assets too.

In the future, investors will aim at remaining flexible enough to focus on options such as land, operating assets, and new mall projects that have the potential to be market leaders with the potential to draw significantly higher footfalls. Typically, the valuation of shopping malls by institutional investors will involve due diligence in terms of these criteria:

• Location of the project
• Rental Income prospects
• Developer’s rating and background
• Lease revenue model
• Overall tenant mix
• Competition in the long run
• Lease churning opportunity
• Malls with the potential for upgradation through re-leasing or other practical approaches
• Associated risks and market conditions

 Investment by PE funds in retail real estate assets will also bring a structured approach to leasing, leading to a more regular performance evaluation of brands within malls. Importantly, investing is as much about exits as it is about returns. As retail assets can become a part of the REIT portfolio, options for exits open up, which enhances the liquidity of such retail assets.

Pankaj Renjhen is Managing Director – Retail Services at JLL India

The post REITs to boost retail asset investments beyond the metros appeared first on International Finance.

Of the four Indian cities featured in the APAC study, three – Mumbai, Delhi and Bengaluru – figure among the top-15 markets, while Chennai sits outside of the top-15. Rentals of prime south areas were considered for both Mumbai and Delhi while prime city rents were taken into account for both Bengaluru and Chennai.

The dichotomy seen in Indian retail rents continued in 1Q17, with high quality shopping centres continuing to outperform their average counterparts. The former also continue to attract foreign retailers. For e.g., Scotch & Soda, a leading Dutch brand, made its debut in India in 1Q17 with a store each in Delhi and Mumbai.

Other international retailers such as H&M, Gap and Marks & Spencer continue to remain in expansion mode, enticed by the country’s strong long-term prospects. Going forward, single-brand retailers (mainly fast fashion) and F&B operators are expected to be the primary drivers of demand in the country’s retail markets.

Another trend over recent years in India has been the changing preference of several retailers towards the revenue-sharing model instead of the older fixed-rent model. Revenue-sharing models typically followed by malls place different retailer categories in different brackets, for e.g., 12-25% for F&B tenants; 9-18% for vanilla spaces; 7-9% for anchor tenants; 3.5-4.5% for hypermarkets and 3-3.5% for electronics’ retailers.

Asia Pacific Shopping Centre Rents, 1Q17

Limited available space due to strong demand and a lack of new additions in the most expensive and central locations contribute greatly to the rental gap. A higher level of sales activity and increased brand exposure are core reasons retailers seek those locations.

Pankaj Renjhen, Managing Director – Retail Services, JLL India

The post Retail rents remain flat across major Indian cities appeared first on International Finance.