Serve the middle class, profitably!

It was some time earlier in 2010 when a few big realty firms such as DLF and Indiabulls Group shelved their plans to develop retail malls in Lower Parel in Mumbai, and instead used the land to develop premium residential and commercial projects. That was mainly due to the high rental rates and scarcity of retail space in good locations.

The Indian real estate sector is again all set to witness a similar trend in FY 2012-13, if analyst reports are to be believed. It is not that builders have not been contemplating alternate utilisation avenues for their landholdings, but the decision is quite appropriate due to some ground realities, especially linked to the policy decisions announced (& decisions held back) in the Union Budget this year. Ramesh Nair, Managing Director – West, Jones Lang LaSalle India, affirms, “The lack of a decision on FDI in multi-brand retail will further discourage developers from constructing malls in the city (Mumbai)... Builders have to wait for 8 to 10 long years to get return on investments if they are building malls.” From close to 50 players developing malls before the 2008 financial crisis, not more than six developers are now building retail projects.

Typically, a 7 lakh sq. ft. mall involves a Rs.1.5 billion upfront payment for the land and another Rs.2.5 billion for development, apart from interest and other costs. Over 75% of these are holding costs for a developer. For malls which are unsuccessful, “the rentals received are not even enough to pay interest costs," says Kishore Bhatija, Managing Director, Inorbit Malls (India) Private Ltd., which is run by K. Raheja Corp.

On the other hand, the decisions in the Union Budget 2012-13 seem to be well directed at making the affordable housing segment more lucrative. In particular, allowance of External Commercial Borrowings (ECBs) in the sector, extension of 1% interest subvention on housing loans costing upto Rs.15 lakh (for houses costing less than Rs.25 lakh) and reduction of withholding tax on ECB interest from 20% to 5% have truly boosted the attractiveness for developers.

This couldn't be truer in a state like Maharashtra, where the revision of the stamp duty for leave-license is definitely going to impact the rental market in the residential, commercial and retail asset classes. The corporate commercial property market will be less affected, since this asset class typically operates on leases locked in for longer tenures, which can extend for upto 3-5 years. However, retail property leases will feel the pinch, since this sector typically works on annual leases in the form of leave and license. Also, residential apartments are usually given on renewable leases of 11 months, with the nature of agreement being leave and license. The previous stamp duty on these agreements was nominal at 0.1per cent of the lease amount. As things stand now, a person paying a rental of Rs.10,000 per month will cough up stamp duty to the tune of Rs.1,200 as opposed to the earlier Rs.120. This will lead to increase in demand for houses on ownership basis. Looking at the scenario, master planners need to understand that with the conversion of retail mall development into residential housing, developers will be able to save on the increased rentals that have become a norm in retail properties. Also, they will not have to wait too long for return on investment in the long-term; and affordable housing, anyways, is a laudable social goal. When contacted, Navin Raheja, Chairman of Delhi-based Raheja Developers Ltd. comments, “We will be happy to undertake affordable housing projects on land where a retail project was supposed to come up, provided the master plan norms provides such provisions and land can be exploited fully and is economically viable.”

However, builders firmly believe that only high end residential projects can come up at locations where retail mall development was anticipated in the main cities. Lalit Kumar Jain, Chairman, Pune-based Kumar Urban Development, explains that usually, areas where malls are located are very prime and priced at a premium, and are not located in areas where there are a lot of kirana shops. So the key question is really with respect to viability of such projects in the main cities.

However, the trend is clearly picking up in suburban areas. Off late, top builders have started becoming more opportunistic in terms of development of value-for-money housing on lands where development of retail malls has been shelved; especially in Mumbai, Delhi, Bangalore, Ahmedabad and Pune. While real estate companies based in Bangalore such as Puruvankara & Brigade Group have started developing value-for-money housing on suburban land where retail mall projects were scrapped, Mumbai-based Rustomjee Developers, too, has started charting plans to convert retail mall development in extended suburbs of Mumbai into residential development, as they feel that Indian customers are extremely value conscious and they will successfully be able to develop value-for-money residential projects in the short-term for them.  Mumbai-based Niranjan Hiranandani, Managing Director, Hiranandani Constructions, agrees, “We consider converting a retail mall project into a residential project in extended suburbs of Mumbai as a positive opportunity. This is actually a way forward for continuous growth prospects in the realty sector to earn faster returns on investment, even if tapping the opportunity may seem riskier considering rising input, construction and land costs.”

Following the announcement on ECBs, it's time for top builders to tap the opportunity for affordable housing on land banks that house stalled retail projects, at least in these suburban areas. This is because allowing ECBs for affordable housing is a great boost for builders. Currently, the affordable housing sector is typified by low margins, and it becomes attractive only if developers are able to generate and sell more units. Better capital availability through the ECB route will help in timely project execution and consequently higher volumes.