Developers Losing Interest in Building Malls

Well, it does come as a surprise, but real estate developers are indeed losing interest in building any new malls, especially in Delhi and NCR. This does not indicate in any way that other cities across the nation are excluded from this decision. Just when people had become accustomed to the “mall-culture”, this decision could affect the business aspect of major brands as the market dynamics today indicate fierce competition.
Factors Which Dissuaded the Developers From Building Malls
Cost does play an important role in dissuading builders from taking up mall development projects, but market saturation also contributes to the dissuasion of the developers. Compared to previous years, this year only 2.4 million sq. ft of mall space would be developed. This is almost half of what has been developed in the previous years.
The land costs are rising, especially in major cities, due to which it has become difficult to invest and witness appropriate returns for large establishments such as malls. These assets take 3 to 4 years to bring it to operation ready status. Such long term investments requiring increased funding would only hold up finances for the builders. The scenario gets even more complicated owing to the uncertainty of the property market at the time when the mall gets completed.
Another important factor which has affected the scenario is that the consumption has not grown in tandem with the growth in prices of the land and other property assets. It is this factor which has made the construction of malls unviable at the moment. A good example of this can be seen in Mumbai where the land prices have gone up by 50 times in just 10 years whereas the consumption have grown by 3 times and the rents have doubled in the same duration. All of this provides unfeasible investment grounds for developing malls.
Reasons Behind the Shutting Down of Some Malls
The last two years have witnessed the development of approximately 120 malls out of which around 40 malls have been shut down. A slow paced economy has certainly contributed to the closing of these malls, but a major problem that mall owners faced was the high vacancy in their establishments. This was the main reason behind the closing of over 24 malls in Mumbai, Delhi-NCR, Bangalore and other major cities.
Building malls require certain expertise and as of now, it is clear that only those who wish to build a portfolio of malls are the ones to get a little success. Others are just being met with vacant spaces that are desperately in need of occupancy. One of the reasons behind such high vacancy rates (as high as 19% in regular malls across the country) is the lack of adequate quality. The vacancy in high grade malls is 10% which is almost half the vacancy levels in other malls.
What is Driving the Growth in Malls in Smaller Cities?
Places like Kota, Tiruvanantapuram and Indore are witnessing increased participation of builders in the establishment and development of malls. These cities are being favoured because the land prices in the vicinity of INR 1000 per sq. ft. which is reasonable enough for developers to invest and recover later. Another factor which makes these places profitable is that in smaller cities, people often get intrigued by malls and they are bound to visit them for the new shopping experience. Such crowd and frequency of visit along with good facilities entices business and brands to take up an outlet in these malls. So considering the current scenario, places like Indore would provide fertile grounds and good enough prospects for malls.
Commercial or Residential Development?
The problem with mall development is that the builder has to wait 5 years to get returns from their investment. Even if they manage to get returns, it is only 15% to 20% of the investment. These 5 years include 3 years spent in construction and 2 years spent in operations.
Compared to this, the residential real estate market is performing better and is giving better returns with the revenue being generated even before the project is launched. Indore has also exhibited a price appreciation of 3.3%, making it the highest appreciation in the country currently.
Such factors have enticed developers into moving towards residential development avenues and other non-mall establishments. If mall developers need to fill their vacant spaces, then they need to come up with new strategies that would help them to fill the void as soon as possible.

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