Investors struggle for value

A construction boom and fast growing retail market are fuelling development of over 500 malls in India by 2009, but private equity and real estate funds are still struggling to find the right projects.

Funds are seeking projects with the right retail mix, size and strategy but are meeting instead with developers with unrealistic growth plans, dubious title deeds and unknown retailers with unhealthy balance sheets.

"It is a scary situation at the moment. One has to be very careful if it comes to shopping malls," says Alex Hayim, director at privately-run REIT Property Management, which is yet to invest in a mall despite being in India for over two years.

While India's organised retail -- just 3% of the total industry now -- is expected to grow 40% a year to $22 billion by 2010, developers have set ambitious targets to add retail space in malls, dwarfing plans in other Asian cities.

While 103 malls are planned in Delhi and surrounding areas by 2009, Shanghai and Beijing will together see 56 malls coming up, estimates by property consultancy Cushman & Wakefield indicate.

"Picking up the right opportunity becomes a big question mark," said Rajneesh Mahajan, national head-retail, Cushman & Wakefield. "It's about the developer's ability to construct and then run those operations efficiently."

Wanted: Mall makeover

Real estate funds, hoping for a larger play in India's market after restrictions were placed on bank funding on projects, see value in townships, commercial and residential projects, but are frustrated by the many start-up problems that plague the sector.

Malls come with new challenges, inheriting typical real estate problems -- lack of transparency, restrictive regulations and valuation differentials -- and retail's teething problems.

Curbs on foreign retailers' entry has also hurt projects.

"There are not enough international retailers that these funds recognize," said Anuj Puri, country head, Jones Lang Lasalle Meghraj. "Among Indian retailers, the bigger ones still have healthy balance sheets, but smaller ones don't."

Lack of parking, inferior surroundings and poor construction quality characterise Indian malls. Over 90 percent of current and planned shopping malls fall below international standards on specification and design, said a Jones Lang Lasalle report.

Funds are also questioning the way these malls are managed.

"Today, there aren't enough highly professional mall management companies as overseas. As a result, they wonder who will do promotions and get in additional footfalls," said Puri, adding proven track records help investment decisions.

Funds are also not keen on developers who sell out space for a quick return instead of adopting the leasing-out model used internationally.

Value still secure

Property executives believe the real problem lies in the lack of understanding and co-ordination between investors and mall developers. The solution is to combine technical expertise of specialists with the developers' local knowledge, they say.

There is real value in mall projects, says Ramesh Jogani, managing director at IndiaReit Fund Advisors, which has invested in a mall, but only as part of a township project.

"A mall could double its value in 4-5 years. Apart from lease rentals, you can sell out to a strategic investor at a later date, when there is a surge in value," he said.

"If the tenant profile is strong, location is good, footfall is good, everyone makes money," says REIT Property's Hayim. "It's an asset which can go up in value, there's no doubt about that."