Real estate giant Ivanhoe Cambridge had big ambitions for India but for now is pulling out of the market without a deal to its name – victim of infrastructure challenges and a shaky Indian mall landscape.
DLF Emporio shopping mall in New Delhi, India
Photo: Graham Crouch, Bloomberg
About three years ago, the Montreal-based shopping-centre specialist set up an office in Mumbai, named a senior executive to head it and looked to pour millions of dollars into projects. Today, it’s closing its office in India, where it had 10 employees, blaming a weak network of roads and public transit to get people to and from buildings, and failure to find an appropriate domestic partner. Industry experts also point to notorious red tape in India and high vacancy rates in malls.
“We didn’t feel that we were at a point where we could find the winning formula,” Claude Sirois, senior vice-president of emerging markets at Ivanhoe in Montreal, said in an interview. “Does it take anything away from the potential of India? The answer is no. Does it take anything from the retail potential in India? Definitely no. The demand is there.”
Ivanhoe’s foray into India is a cautionary tale for other companies aiming to cash in on the burgeoning Indian economy and fast-growing middle class shoppers. On paper, it’s a land of opportunity: its gross domestic product jumped 8% in 2010 and is forecast to pick up 8.5% this year, according to figures from the Indian Ministry of Finance. In contrast, Canada’s GDP rose just 3% in 2010, and is projected to climb between 2.2% and 2.4% this year.
While the population in North America is aging, which moderates consumer spending, it’s growing quickly in India, spurring retail business. Indian retail sales will almost double to $804 billion (U.S.) by 2015 from today, according to the Business Monitor International India Retail Report.
But developers have to grapple with government bureaucracy that can delay projects for years, poor mall planning and high retailer turnover. Many malls are a mish-mash of different types of merchants, scattered over multi-storeys with shoppers rarely venturing to top floors. Others are located in a city’s outskirts with scant parking, although consumers prefer nearby urban stores. Most of the more than 200 shopping centres in India are struggling, hit by high rates of vacancies, industry experts say.
“It’s a challenge which I would imagine a lot of overseas developers would face,” Raghav Gupta, principal of consultancy Booz & Co. India, said in a telephone interview from New Delhi.
Only between 10% and 15% of malls in India draw enough shoppers to make them profitable for retailers, Gupta estimated. The failure rate makes it difficult for a company such as Ivanhoe to find a dependable local partner to team up with.
Many malls falter because developers built them looking to turn a fast profit, selling off units to third parties who then rented out the space to retailers without co-ordinating the uses with other tenants, he said. At the same time, rental rates are high, making up between 15% and 20% of a merchant’s sales, compared with between 8% and 12% in Europe, he said.
Most retailers are small mom-and-pop shops, without strategic plans for locating in malls. “Everybody is learning about the market, figuring out what works in India and what doesn’t work in India,” he said. “Norms are not established as yet.”
Amanpreet Banga knows all about the challenges of foreign companies betting on Indian retail real estate. Until this spring, he was commercial director at European mall titan Ségécé in New Delhi, aiming to strike agreements to manage shopping centres in India. Like Ivanhoe Cambridge, Paris-based Ségécé recently retreated from the Indian market.
Indian developers “don’t want to pay a huge amount, giving part of their profits to a management company,” Banga said.
Even so, developers are starting to map out more profitable models for malls in India, he said. They’re trying to ensure that similar types of retailers – such as women’s and children’s apparel merchants – are located next to each other. They’re adding seating areas to the centres, giving shoppers a chance to get re-energized so they can shop more, he said. Big foreign chains are beginning to enter India as wholesalers, and the government is looking at loosening restrictive foreign control rules to allow them to sell directly to consumers.
“The mistakes have been understood – the lessons are there,” said Banga, who now specializes in retailing with a realtor in New Delhi. “The difficult part is the implementation.”
Ivanhoe’s strategic shift comes as its parent, Caisse de dépôt et placement du Québec, Canada’s biggest pension fund manager, revamps its overall real estate operations, merging its mall division with its office- and residential-building unit in a bid to find savings. In the office segment, the Caisse said in 2007 that it wanted to invest up to $1.6 billion in India.
Mr. Sirois wouldn’t comment on specific numbers, but confirmed that the company has not directly invested in any real estate there. “We didn’t feel that in the short term it was possible,” he said. Instead, the company has put money indirectly into real estate funds in India, and will continue to do so.
Nevertheless, Ivanhoe will continue to invest in international markets, which it has been doing for 15 years – the past six in emerging markets such as Brazil and, to a much lesser extent, China, Sirois said.
The company will keep its eye on India from a distance, he said. In the long run, “we can’t afford not to look at India. This is a growing market. This is what, in our business, we look for.”
BY THE NUMBERS
6%: Organized retail’s share of the Indian market.
20%: Organized retail’s estimated growth rate.
Six million square feet: Growth in India’s retail space in the first six months of 2011.
$3,500 (U.S.) Per-capita gross domestic product (2010), 162nd in the world.
Labour force by occupation:
Agriculture: 52%
Industry: 14%
Services: 34%
8.4%: Inflation rate
Sources: Staff, Reuters, CIA World Factbook, Bloomberg, CB Richard Ellis
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