Will E-Commerce Kill The Malls? Not According To JM Financial

Many believe malls have no future, but JM Financial is not one of them

One of the hottest topics of debate in investment circles in recent years has been around the disruption caused by e-commerce to brick-and-mortar entities. Many experts have warned that the rising popularity of e-commerce giants like Amazon would inflict a heavy toll on brick-and-mortal retailers, leading to downgrades of organized retailers and mall operators — who are seen as collateral damage.

Indeed, many malls in cities like Mumbai are in terminal decline, with few visitors and even fewer shoppers.

However, financial services firm JM Financial Institutional Securities shares none of the pessimism. It has just initiated coverage on India’s retail real estate sector — more or less congruent with mall operators — claiming — if not in so many words — that the good times are just starting.

In its latest report, titled “Riding the Consumption Wave”, JM Financial says India’s retail industry will grow at an average of 14% per year between FY2022 to FY2027, reaching Rs 120.6 trillion. Key drivers will be rising urbanization, a growing middle class and the younger population’s higher spending power.

“Despite inflationary pressure, the retail sector has demonstrated impressive growth, clocking a value of INR 62.90 trln in FY2022,” the report said.

While overall retail is expanding rapidly, JM Financial expects organized retail to grow even faster as more consumers shift from unbranded goods to recognized retail chains and e-commerce platforms.

Scarcity of Quality Retail Assets

A key theme in the report is that India has an acute shortage of quality, Grade-A shopping malls preferred by prominent retail brands. JM Financial estimates the country only has around 100 Grade-A malls, resulting in just 0.04 square feet of high-quality retail space per capita. This compares to 24 square feet per capita in the United States.

“Urban consumption centres (large format Grade-A retail Malls) are a preferred destination for the majority of organised retailers looking to expand their physical presence in India due to the limited supply of high-quality retail space in the country,” the analysts wrote.

They believe incumbent mall operators like Phoenix Mills and Nexus Select Trust are best positioned to benefit from this supply-demand imbalance. With demand outpacing new construction, vacancy rates have remained low while rents continue to rise. JM Financial sees this dynamic continuing, forecasting a 271 basis point decline in vacancies by 2024 along with 6-8% annual rental growth.

Bright Prospects for Organized Retail

The report highlights the enormous growth potential for organized retail in India as rising incomes swell the ranks of middle class and urban populations.

One of the key assertions in the report is that the middle class will account for 79% of households by 2030, up from just 23.7% in 2010. It says India’s median age of 28.7 years and 74% of the population under 45 also bodes well for discretionary spending over the long term, it said.

With increasing demand for branded goods and modern shopping environments, JM Financial believes Grade-A malls will continue to see strong occupancy and steadily rising rents. It projects EBITDA for Phoenix Mills and Nexus Select Trust to compound annually between 11.5% to 29% over the next four years.

Sumit Kumar, analyst at JM Financial and author of the report, summed up the firm’s upbeat view: “Given these favourable tailwinds, we expect vacancies in retail real assets to remain low in the short to medium term.”

He added, “We believe retail assets should continue to command a premium vs. other real estate asset classes due to superior growth profile and favourable macro tailwinds.”

Consumption Wave Has Room to Run

India’s position as one of the fastest growing major economies sets it apart from developed countries where populations are aging and growth is slowing. JM Financial points out that consumption accounts for 59.6% of India’s GDP, far higher than the global average of 55.7% and more than double China’s reliance on domestic spending.

From 2014 to 2021, India’s consumption grew at a 10% CAGR, well ahead of China’s 8.5% rate and more than double the 4.1% growth seen in the United States.

The analysts attribute this to rising incomes, a growing middle class and rapid urbanization. They say India’s urban population has grown at a 2.5% CAGR over the past two decades, increasing from 293 million in 2000 to 493 million in 2021. Urbanization is expected to continue, with cities projected to be home to 50% of the population by 2050 compared to just 35% currently.

With a large and youthful population, an expanding middle class and steady migration from rural areas to cities, JM Financial believes India’s consumption boom still has a long runway for growth. This presents a compelling backdrop for retail real estate developers and mall operators.

Favorable Demographics

A major theme in JM Financial’s outlook is India’s demographic profile which supports strong consumption growth for years to come.

With a median age of just 28.7 years compared to 38.4 in China and 38.5 in the U.S., India has the world’s largest youth population. 74% of Indians are under the age of 45, providing a solid foundation for discretionary spending.

Rapid growth of the middle class is another positive trend. The share of middle income households earning $5,000 to $50,000 annually has jumped from 23.7% in 2010 to 73.1% in 2020. JM Financial sees the middle class swelling to 79% of households by 2030.

Urban vs Rural Demand

While India’s overall population is still nearly two-thirds rural, JM Financial highlights the steady migration to cities seeking better job opportunities. Urban dwellers increased from 293 million in 2000 to 493 million in 2021, a 2.5% CAGR.

This urbanization supports demand for organized retail and modern shopping environments like malls. JM Financial says urban centers are the preferred expansion avenue for most branded retailers compared to lower income rural towns.

With urbanization projected to continue, hitting 50% of the population by 2050, India’s metro areas should see robust retail real estate development and consumption growth for decades to come.

Inflation Impact

Like most sectors, India’s retail industry is navigating high inflation which could potentially curb consumer spending. However, JM Financial notes that consumption has remained resilient so far in 2022.

Citing annual growth of 18-35% for categories like clothing, footwear, restaurants and recreation, the analysts say higher prices have not yet put a major dent in demand. They believe India’s strong tailwinds of urbanization, rising incomes and a growing middle class should help sustain steady consumption growth long-term.