Distressed Indian retail malls are an urban infrastructure opportunity
December 29, 2017
Retail shopping malls in India have become a part of the urban landscape, but the struggles they face for surviving have not subsided. According to a study by Jones Lang Lasalle conducted in 2015 a little over 10 percent of malls in the National Capital Region were profitable. Unsuccessful malls can be broadly classified under two categories. One the retail malls that have poor planning and management and therefore struggle. Such malls have the potential to turnaround as a retail mall itself but with better mall management, tenant management and higher quality anchor tenants. Second types of malls are those that have no potential as retail mall as such due to poor catchment areas and haphazard planning. The latter type of malls is of interest and provides the patient and slightly adventurous investors the opportunity to create urban infrastructure to cater to the rising consumption needs in the urban areas in India and reap profits in the long run.
In cases where the property is deemed to be unfit for retail use, the property and especially the land on which the property stands, needs to be looked at as an asset which can generate value through alternative uses such as healthcare service centres, convention centres and education centres. Indian consumption needs are rising with an ever-increasing population (at 1.13 % annually as in 2017 on a base of 1.2 billion) and rising per capita incomes (India’s per capita income grew by 9.7% to Rs1,03,219 in 2016-17 according to Ministry of Statistics and Programme Implementation) especially in urban areas. Urban infrastructure (such as hospitals, convention centres for trade and education institutions) has lagged demand and distressed malls provide the much-needed land to create such urban infrastructure.
In the US, the conversion of malls into healthcare facilities including hospitals, nursing homes and clinics has been substantial. While there are strict regulations around the healthcare facility buildings and a certain investment will be needed to redevelop the property, appropriate properties that can be obtained at attractive low valuations create an opportunity for patient investors to develop healthcare facilities in urban India to cater to the increasing urban Indian population. In addition to healthcare facilities, as Indian business and trade grows there will be an increasing need for convention centres. According to a 2017 study by ICCA (International Congress and Convention Association), India has 0.5% of the global market share in convention and exhibition centres and ranks 31st in the world compared to rival Asian economic super powers such as China that ranks 8th. Distressed malls can be converted to convention centres to realize value from these assets. This conversion and the creation of an ecosystem around convention centres, will lead to job creation not only in the convention centre ecosystem but also within the hotel industry through trade and exhibitions. Another sector in India that needs additional infrastructure desperately given the demographics is education. Struggling malls in the US have seen conversions that have allowed community colleges and preparatory classes to move into areas occupied by retail malls in the past. Distressed Indian malls present a similar opportunity for primary schools, technical education institutes and skill training centres to leverage the existing infrastructure.
It is true that the naysayers would assert that rents from medical facilities, convention centres and infrastructure for education cannot match retail mall rentals. This is agreed. Our point is the that there is a need for identification of those mall assets that do not necessarily have a future as a mall even if they were given better management, anchor investors and tenant mix. Given the slightly haphazard mall construction in India over the last decade we believe such properties are available. We cannot overemphasize on the value creation of the above strategies for the entire ecosystem. The original owner of the distressed asset gets to monetize some value of the asset, investors get access to attractive investments, the economy gets infrastructure to cater to increasing demand and most importantly there is job creation around the infrastructure created. We would even hazard to say that the societal value might exceed the financial value created in some cases, and the financial value created will provide some very attractive investment opportunities.
Author Taponeel Mukherjee is the CEO of Development Tracks. Established in 2000, Development Tracks provides advisory services in infrastructure, real estate, finance and public policy. Development Tracks is deeply interested in leveraging assets from an operations perspective and providing efficient capital structures. We want to engage with you if you are interested in India as a potential business opportunity. You can reach Taponeel at email@example.com or on Twitter at @taponeel. You can find out more about Development Tracks at www.developmenttracks.com