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NEGATIVE SUPPLY IN INDIAN RETAL SPACE

Limited supply coupled with closure of certain malls resulted in a negative supply in retail space for the first time ever in 2016, a recent survey said. According to property consultant Jones Lang LaSalle (JLL), closure and change in usage of failed malls, limited new supply led to net negative supply of 3 lakh sqft in 2016. "For the first time in India's mall history, a net negative supply of retail space was observed in 2016 due to closure of some failed malls coupled with limited new supply," the report said. "While five malls shut down last year, 10 others changed their usage to offices, educational institutes, shopping clusters, hospitals and banquet halls," it added. This resulted in 3.5 million sqft of retail space, across 15 malls across India, getting withdrawn from the operational stock. These malls were operational in Chennai, Delhi-NCR, Mumbai and Pune. According to the report, it is not the first time that a withdrawal of mall space was done but the quantum this time around was far higher than all previous withdrawals between Q1 2010 and Q4 2015 put together. "This is in large part due to the long continuing bipolar dichotomy in the Indian retail sector starting to reach its end. Therefore, a few more malls are expected to meet a similar fate in the next few years," it said. In 2016, the total net absorption of retail space in India was 2.7 million sqft with Delhi-NCR recording an absorption of 1 million sqft followed by Mumbai at 6 lakh sqft and Bengaluru at 4 lakh sqft. While 13 malls got completed in 2016, 15 malls were withdrawn from the operational stock, resulting in a net effect of 3 lakh sqft reflecting on the supply side. "Despite these withdrawals, the Indian retail story still remains intact. In the past few quarters, a new interest of private equity investors towards the retail real estate is witnessed. Moreover, 2017 appears to be a strong year, with over 9.1 million sqft of supply expected to come in. "Completions expected to be ready by end of this year have highly-skewed pre-commitment levels," said the report.

Falling sales to affect refinancing of realty sector

Falling sales have dimmed the hopes of cash-strapped real estate developers for refinancing their debt obligations in FY18, says India Ratings and Research.
The sector has mainly relied on refinancing to meet debt servicing obligations given the negative cash flows, and is unlikely to witness a revival in sales in FY18 and refinancing will increasingly become difficult, it said.
"Such refinancing has provided a cushion for developers to hold prices despite slowing sales, and the high prices will further delay recovery in sales and cash flows," the rating agency said in a statement issued here.
Realty players have been less reliant on bank credit, and the growth in banking credit to the commercial real estate sector slowed down in FY17, with a growth of mere 0.4 per cent since the start of the FY17 till January 20, it said.
Also, a significant interest had been observed from non-banking finance companies and private equity investors for refinancing debt in the last three years.
"Finances of real estate developers continue to remain stretched due to elevated inventory and debt. It is estimated that debt levels will further rise given the negative operating cash flows," the agency said.
It noted that the Indian realty market is currently grappling with a double whammy: cash shortage caused by the impact of demonetisation and the imminent introduction of the Real Estate Regulator (RERA).
"This, along with the increasing refinancing risk, would shake up the sector, with developers with high leverage losing out. The sector also needs to undergo a structural change in the way it does business and move towards a model where projects are completed before sale. Such a structure would favour real estate companies having better access to funding," it said.
The agency further pointed out that larger players with access to multiple funding sources, such as NBFCs, PE funds and FDI in addition to banks, are likely to have an advantage.
"This could lead to consolidation, which may be in the form of land sales or joint development of land with larger organised and well-funded developers. This will usher in a new phase for the sector which is overcrowded with plenty of players with weak financials," it said.
"We are likely to witness a series of joint developments and joint ventures between landowners and financially weak small developers with bigger, better-funded, better-organised players or weaker developers getting taken over by well-funded larger players, and struggling developers cashing in their land banks by selling them to players with stronger balance sheets and appetite for growth," the report stated.

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