INRnews - Indian Real Estate News

"India is booming and currently has the world’s focus as a major retail real estate destination promising strong yields for investment and stable cash flows. At present, there are significant investment opportunities in this sector as it is experiencing consistent growth with its top six cities accounting for nearly 68% of organised retail, and its top ten cities accounting for 85%. It is expected that in next two years Tier II cities will contribute almost 25% of organised retail.

Most of the developers want to make the most of this situation but before taking any decisions one must rate the project not only in the macro level (sectoral growth) but also in the micro level (individual project level) to ensure a viable retail real estate project.

On the project level before investing one must judge it in relation to the main investment grading fundamentals of a retail development like the visibility, approach and access, location highlights, catchment/neighbourhood highlights, profile of the primary and secondary trade area, permissible land use, permissible construction norms, competition in the vicinity, landowners/developer’s credibility and title of the land.

There are various risks that one can face while investing in a retail mall project.
The main pre–construction risk is from delays in land acquisition, which will inevitably lead to an increase in the project cost. Other pre-construction risks include acquiring a clean title without conflicts/litigations, or adherence to development control norms like ground coverage and Floor Area Ratio (FAR). Various clearances from different authorities also have to be obtained before construction of a mall.
 
Construction risks mainly relate to design issues and the management of construction activity to avoid any time or cost overruns. It is crucial to examine the developer profile and track record of the projects undertaken by the developer, to control such risks.

Market risks can emanate from demand risks and revenue risks. The demand risks pertain to the demand potential of the retail mall whereas the revenue risks relate to revenue generation by the retail mall, essentially the lease rates and occupancy levels.

Operational risk is essentially the risk of improper maintenance of various services and facilities available in the mall, which can adversely impact the revenue generation potential. Appointing a professional facility manager for the operation of the mall can mitigate this.

Financial risk includes interest rate risks and exchange rates fluctuation, especially when FDI is involved. In recent times, RBI has increased the risk weightage associated with real estate lending by banks. This has led to an increase in lending rates to real estate projects. A lending interest rate of more than 11% could make a retail project unfeasible if the debt equity ratio is very high. Hence, this risk needs to be mitigated by adopting an appropriate financial structure in consonance with the cash flow profile of the retail development in question. 

Therefore, although the retail sector offers attractive returns to an investor, it is imperative that an investor considers all the above parameters before investing in a retail real estate project."

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