Ajay is a Managing Director at Taurus Investment Holdings and leads the Boston-based global investor Indian affairs.
After higher holiday sales than expected in 2022, it would be tempting to imagine all is well again in the retail and retail real estate sector, which has been ravaged globally by two years of pandemic-related closures and restrictions. However, the truth is far from rosy; retailers in the US, in fact, are seeing it muted sales (registration required) because inflation scares customers to open their wallets. With a long-term excess of shopping center space and widespread pain among loyal mall tenants, many malls across the country may be closed or converted to other uses, including residential units and offices.
The outlook for shopping centers across Western Europe also remains bleak. Facts (registration required) from retail specialist Sensormatic shows footfall in the US, Canada, UK, Germany and France still lags behind 2019 figures. The retail market in China, where more retail space has been developed than anywhere else in the last 20 years , was devastated by nearly three years of Zero Covid policy and only recently started to recover when restrictions were lifted. Although Latin America and Spain have generally performed better, offline retail footfalls and sales are barely higher than in 2019.
Does this mean that an investor who wants to support the development of shopping centers is out of luck for a long time, if not forever? Not necessary.
The future of retail real estate: India
Investing in retail real estate has long been a way to profit from consumption, which is a huge part of any economy. Leases for retail properties are generally shorter than those for office buildings, which means that rent increases can more often take place at market value. Because retail consumption is local, retail landlords can build in more markets than offices, which tend to be concentrated in major cities. Consequently, some of the largest institutional investors around the world, including giant pension funds and sovereign wealth funds, have directly or indirectly supported shopping malls, while owners such as Simon and Unibail Rodamco Westfield have found favor with investors large and small.
Fortunately for retail-focused investors, there are still some markets where retail property remains an attractive asset class. Chief among them is India. (Full disclosure: My company makes private equity investments in real estate all over the world, including the US, UK, Germany and India.)
By some estimates, India is already the most populous country in the world, with more than 1.4 billion people. The population is young (of the country average age is 29compared to 38 in China and the US and 48 in Germany) and very ambitious, with rapid urbanization sending hundreds of millions of people to the country’s many cities. With a rapidly growing middle class numbering in the hundreds of millionsIndia’s domestic consumption is relatively high (60% of GDP against China’s 38%.
These factors, plus the higher level of isolation from global economic shocks, are driving the country’s retail sales, estimated at $1.4 trillion by 2026 and $1.8 trillion by 2030, a promising opportunity for investors. No wonder that consulting firm Kearney ranks India as the second most attractive retail market in the world behind China, but believes that the Indian market is expanding while the Chinese market is saturated.
In a recent article in the Financial timesMorgan Stanley Asia economist said India’s economy will grow $8.5 trillion by 2032. India’s GDP is now the same as China’s in 2007, giving an idea of the sheer magnitude of economic opportunities for investors over the next two decades.
While these GDP and consumption growth rates are unprecedented, what really makes the idea of developing high-end retail spaces in India special is the undersupply of prime shopping centers in the country. A population larger than that of North America and Europe combined is served by no more than 50 premier shopping centers per year recent research by Knight Frank. This comes out to one fraction of a square foot of retail space per capita, compared to 24 square feet per capita in the US and about 5 square feet in China.
Furthermore, shopping malls in India are not just collections of shops, but also provide safe, clean public spaces in cities that are very crowded and have a shortage of public places. This is a pattern that can also be seen in malls in other Asian countries and throughout Latin America. Entertainment, mainly in the form of cinemas, and food outlets have been important elements of Indian malls from the outset, ensuring a more diversified and resilient tenant mix.
A growing opportunity
Global investors are starting to notice the abundant opportunities to invest in the development of retail real estate in India. Institutional investors love the Canadian Pension Plan Investment BoardDutch pension investor APGSingapore sovereign wealth fund GIC And ADIA of Abu Dhabi have invested billions of dollars acquiring and developing malls through the handful of leading retail developers that dominate the market (including DLF, Phoenix Mills, and Virtuous Retail). While typically giving malls a wide berth in the US or Europe, private equity heavyweight Blackstone has built India’s largest portfolio of malls and is poised to float the portfolio as India’s first retail REIT.
If India wants it to overtake compared to the retail space per capita of comparable regional markets such as Malaysia, Thailand or Vietnam, tens of millions of square meters of new shopping centers need to be built. There are dozens of Indian cities with more than two million inhabitants that still lack a first-class shopping mall.
Given the sheer size of this opportunity, the sound business case for investing in the development of shopping centers in the Indian market and the high returns such investments can generate, it is a good idea that the country will see even higher levels of capital. inflow over the next two decades.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.