PE firms love malls in smaller Indian cities – Study

International private equity investors do not shy away from investing in malls in India’s tier-2 cities such as Amritsar, Ahmedabad, Bhubaneshwar, Chandigarh, Indore and Mohali, according to a study by Anarock Property Consultants.

Real estate can be broadly divided into residential and commercial. Commercial is further divided into retail (malls) and office space.

A total of $1.84 bn invested by international PE funds in the retail segment of India’s real estate sector in the four years from 2015 to 2018.

Out of this, Tier 2 & 3 cities attracted nearly 48% funds (of USD 880 mn) against USD 960 mn in Tier 1 cities.

Also within the $1.84 bn, US-based funds accounted for the biggest chunk, at more than USD 1 bn.

Other sources of investment in retail real estate in India including the UAE, Singapore, Canada and Netherlands.

The bias towards smaller cities was sharper among US investors.

Out of the 1 bln invested by US-based funds like Blackstone and Goldman Sachs in the last four years, more than $700 mn went into Tier 2 & 3 cities, while only $300 mn came to cities like Pune and Mumbai.

Shobhit Agarwal, MD & CEO of ANAROCK Capital said funds like smaller cities as they suffer from no lack of momentum when it comes to retail real estate, unlike in case of office real estate.

This is partly be due to the rising income levels in urban India, including in Tier-2 towns.

“Shopping malls in Tier 2 & 3 cities have performed as well as, if not better than, their Tier 1 counterparts,” Agarwal said. “This also led to increase in rentals and profitability and caused PE investors to start considering investment options outside their accustomed Tier 1 geographies.”

Unlike office real estate, which is influenced by macro-economic factors such as how well the IT industry is doing, the retail sector is more predictable as it depends largely on the spending power of the local population, which does not usually fluctuate much.

Moreover, said Anarock, the Modi government’s liberalization moves in the retail sector have also led to anticipation of demand growth for real estate in this segment.

Modi government has, in its first term, approved 51% foreign holding in multi-brand retail and 100% in single-brand retail.

Investments into retail real estate have shown a sharp increase recently. International PE investment in retail real estate has doubled in 2017 and 2018 compared to the two previous years (2015 and 2016), according to the firm.

ANAROCK said around 39 mn sq. ft. of organized retail space is expected to enter the market between 2019-2022. Of this supply, approximately 71% is expected to come up in Tier I cities, and the remaining 29% in Tier 2 & 3 cities.

“Ahmedabad, Bhubaneshwar, Ranchi, Kochi, Lucknow, Surat and Amritsar, among others, are the new retail growth hubs where the next chapter of the Indian retail story will play out in the coming years,” says Anuj Kejriwal, head of ANAROCK’s retail division.

“In fact, global retailers are now also eyeing cities like Chandigarh, Lucknow and Jaipur, to name a few. There is every reason to expect increasing funding infusions into the retail sector of these cities in the future.”