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WAKING GIANT

As India’s economy takes off, so does mall development

BY DEBRA HAZEL

India’s shopping center industry says a lot about that country’s recent economic history.

Spurred by a rapidly growing middle class in this country of more than 1 billion, developers began building the Indian subcontinent’s first Western-style shopping centers less than three years ago. Now there’s a flood of new projects, with nearly 25 million square feet of additional retail space expected by the end of next year, according to a report published last fall by Knight Frank, a London-based real estate consulting firm.

“This whole industry has just leapfrogged forward,” said Tariq Vaidya, head of advisory services at Knight Frank India. “In 1996 there was no form of organized retail in India at all.”

India’s shopping center sales reached $4.24 billion in 2002, according to the study. At an expected 8.5 percent annual growth rate, shopping center retail will increase from 2 percent of the country’s total retail industry to 20 percent by the end of the decade, the report projects.

“Retail is now being recognized as a serious industry,” said Amitabh Taneja, editor in chief and publisher of Images, a New Delhi-based fashion and retailing magazine.

That is a major shift in a short period of time. A decade ago, India would not have been on any retailer’s radar screen. But economic reforms that followed a financial crisis in 1991 have expanded the private sector and attracted the attention of Western technology companies looking to hire well-educated engineers at a fraction of U.S. salaries. General Electric Co., IBM and Texas Instruments, among other companies, have opened call centers and software development offices in India. The medical services field is also expanding — a magnetic resonance imaging test administered in Boston may well be analyzed in Bangalore.

DLF’s City Centre is part of a 3,000-acre planned community in New Delhi.

As a result, India’s economy has been growing at an average of 6 percent annually since 1990. The young professionals who work at these companies want places to spend their money.

“They are shoppers,” said ICSC Chairman Kathleen M. Nelson, who visited New Delhi in February. “And you see more young men shopping than young women, because these are the people that are the new affluency.”

That has spurred the construction of clustered retail, though the definition of a shopping center in India is much looser than in North America or Europe. A center of 80,000 square feet is considered a mall, though in reality such projects, often at the base of an office building, are closer to a Western minimall.

Even so, “most, from a visual standpoint, are quite attractive,” Nelson said.

These centers have restaurants, and the larger ones include multiscreen cinemas. (That’s no surprise, given that the Indian film industry, affectionately known as Bollywood, is the world’s largest by number of films produced — 1,000 in 2001, according to the U.K. Film Council.)

Because the industry is so new, shopping center developers are likely also to be the contractors or the tenants themselves. There is no real financing infrastructure, such as REITs, so these centers are self-financed by the builders, Vaidya says.

Growth has been concentrated in India’s largest cities — Mumbai (formerly Bombay), New Delhi, Bangalore and Pune, in declining order of size. But retailers are starting to set up in the smaller cities too — Chandigarh, Cochin, Indore, Jaipur, Lucknow and Nagpur among them.

Mumbai, India’s most populous city, with 12.6 million people, will see at least 10 new malls by the end of next year, according to Knight Frank. Development is largely suburban, with an aggregate of 4.7 million square feet of retail space in 22 malls expected to join the 550,000 square feet of existing shopping center gross leasable area by the end of next year.

The centers that get built first will have a distinct advantage over the later ones, observers say, because they’re likely to get their pick of the retailers.

“The number of anchor tenants in the market is currently not enough to ensure the sustainability of all of these malls,” said the Knight Frank report. Indian centers, like European ones, are typically anchored by a supermarket such as Foodworld, or a department store such as Pantaloons.

In New Delhi, India’s capital, and its surrounding area (called the National Capital Region), 23 new malls are expected to open by the end of 2006, Knight Frank says. Development has been concentrated in Gurgaon, a rapidly growing suburb 30 kilometers (19 miles) southwest of the city. Five centers have opened and 10 more projects are planned in Gurgaon.

Phoenix Mall, in Mumbai (formerly Bombay), opened in 1992 in an old mill.

One of the largest projects in the metro area is Gurgaon-based Unitech Group’s 1 million-square-foot Great India Place, which is scheduled to open in 2006 in the suburb of Noida, about 15 miles east of New Delhi. The project is actually two malls and a theme park, says Ro Shroff, a principal at Seattle-based Callison Architecture. Callison is designing the smaller of the malls, which is to include 550,000 square feet of retail and other uses.

Bangalore, one of the fastest-growing cities in India, has seen several new centers go up, though retail development has been slower there than in other markets. Pune, about 130 miles southeast of Mumbai, one of the most mature markets and one with a significant student population, has also seen growth.

The specter of overbuilding looms over all of these cities, though, simply because of a scarcity of tenants. Given the country’s history of protectionism, foreign retailers are banned at present. Some companies, though, such as Marks & Spencer and Zara, have established a presence in India as wholesalers or through franchisees. In Bangalore “seven or eight centers should survive,” Vaidya said. Currently, there are four centers there and another nine are being planned.

Depending on the outcome of national elections scheduled for April, further liberalization is possible, says Shroff. If the ruling Bharatiya Janata Party is re-elected, that could well be the case. Thus, an even greater boom could take place within two years if the market opens to such retailers as Carrefour, Ikea or Wal-Mart.

“That would change the dynamics of the whole thing,” Shroff said. “[Developers] are preparing for an onslaught.”

To Taneja, the issue of development is not so much one of quantity as of quality.

“I don’t think there is more development than we need,” he said. “But the strategy has to be right. There has to be specialization and the right tenants.”

India’s growing numbers of engineers aside, 40.5 percent of the population is illiterate, and 25 percent lived below the poverty line as of 2002, according to the CIA World Factbook. Consequently, despite the country’s huge population, the actual market for the industry is probably closer to 50 million, Vaidya says, estimating from the actual percentage of people with money. That has led to some concern about whether there will be enough customers to support all of this construction; a market correction in three to five years is a distinct possibility, observers say.

“There is no way to sustain that kind of growth,” Shroff said. “The industry is going from infancy to maturity in two years. … Ultimately, there will be checks and balances.”

What is needed is professional management to guide the industry as it matures at this lightning rate of speed, according to industry watchers.

“Though the malls are set to rule the market in the near future, their sustainability is questionable,” says the Knight Frank report. “Given the number of retail malls coming up across the country, it will be the survival of the fittest.”

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