Infrastructure & Policy: Lending support to retail sector

All eyes are on the retail industry as the boom in the organized segment of this sector is expected to be the next big story, currently in the making. After the software and telecom sectors, organized retail is deemed to provide a big boost to the domestic economy. Being the second largest employer, after the agricultural sector, it will result in creation of considerable incremental employment, fueling of consumerism and the developing of real estate, amongst many other benefits.
According to an HSBC Global Research report, the Indian retail industry is expected to touch $550 billion by 2012, supported by rising disposable incomes and favorable demographic factors. To take the sector from around $300 billion at the end of 2006 to the predicted levels entails a growth of around 10 to 11 per cent per annum. Interestingly, of this future business pie, organized retail is estimated to corner 15 to 16 per cent of the total retail market, i.e. $85-90 billion in value terms, by 2012. To get there from the present share of 4 to 5 per cent means that it will be growing at a CAGR of 35 per cent.
Real estate - all geared up
There is no getting away from the fact that the organized retail sector is inextricably linked to the real estate sector - it’s all about the right location, size and décor, over and above the products that are available. So, naturally, real estate developers are playing their part and are all set to meet the increased demand for retail space.
As per Knight Frank, a property consultant, over 100 million square feet of new retail space will come up all over India by end of 2008. A bulk of this additional space that will be made available for organized retail will come from closed mill lands, rehabilitated slums, greater FSI (Floor Space Index), etc.
Many retail and real estate companies co-operate with municipal authorities. Explains Vinita Saxena, senior manager, retail advisory services, Jones Lang LaSalle Meghraj, “Though infrastructure is the biggest challenge, some conscientious developers do attempt to trade off their area for road widening. Many are working in sync with municipal authorities to help improve their vicinity, which contributes to some extent. But there is a long way to go yet.”
Policy initiatives by the Government
FDI in domestic real estate: The Government has been doing its bit to support the efforts made by organized retail and real estate companies. For instance, in a significant move, the government allowed Foreign Direct Investment (FDI) in the domestic real estate in 2005. This move resulted in a number of global players displaying increased interest in the domestic market. A natural corollary was the foray of foreign players and joint ventures with domestic players.
Over the years, India has emerged as one of the most attractive organized retail markets in the world. This has also led to large number of private equity funds launching India dedicated funds. Annual investments in real estate through domestic and overseas real estate funds is pegged at around $7 to 9 billion. Of this around $4 to 5 billion is likely to come though the FDI route.
Allowing international retail brands: Further, policy makers have also permitted single brand retailing in joint ventures with Indian firms, to the extent of a 51 per cent partnership through the FDI route. Not surprisingly, the domestic organized retail sector has attracted many multinational companies such as Wal-mart, Metro AG, Shoprite Holdings, Marks & Spencer, Tesco, Starbucks, Target, etc.
These and many others are venturing or planning to venture into India through various routes such as strategic tie ups or joint ventures, etc., or already have a presence through the franchisee route. For instance, Wal-Mart has entered into a tie-up with Bharti, while Woolworth has entered into a joint venture with the Tata Group. What’s more, Liberty International, UK and CapitaLand, the world’s largest retail developers and mall managers, have also entered the domestic real estate and retail market.
Freeing of locked land: In June 2005, the Government of India cleared the SEZ Act to promote industrialization and develop more cities. Though currently it is topic of intense debate among various stakeholders, the Act would go long way in developing real estate and organized retail in future.
The repeal of the Urban Land (Ceiling and Regulation) Act, 1976 (ULCRA) by Gujarat and Goa is another significant development on the policy front. Maharashtra is also considering following other states to free land in cities for real estate development.
Lastly, development of mill lands, like that of the National Textile Corporation, has ensured availability of suitable locations for organized retail.
The western region leads the way
At present, the west region dominates in terms of number of malls and organized retail space as well. In terms of organized retail space, western region - that is three states of Goa, Gujarat and Maharashtra - accounts for close to 40 per cent. This region has played a key role in pioneering the concept of organized retail in India. Right from India’s first mall – Crossroads that was set up in Mumbai way back in 1999, the west region has always taken a lead in introducing new formats and setting newer benchmark.
For instance Reliance Retail launched the country’s largest hypermarket called Reliance Mart located at Ahmedabad in August 2007. The hyper mart, with shopping space of 1.65 lakh square feet, is designed to offer 95,000 products under own roof. The region has been continuously improving its business models and bettering the economics that goes behind running new age retail formats too. And, more often than not, it has had the support of the Government.

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