While the government's decision to allow up to 51 per cent foreign direct investment in multi-brand retail has stirred up a debate on its merits and demerits for the economy, one area sector that seems to be buzzing with excitement is the real estate industry, which has been languishing for a while on the back of an oversupply of saleable and rentable property. Besides, the number of deals during the past several months in both outright sale and leased properties has been dwindling.
Which is why the anticipated entry of global retail giants into the country seems to be just what the doctor ordered for the ailing domestic property market.
Property pundits believe that the entry of internationally reputed retail corporations like Wal-mart, Tesco, Carrefour, Metro AG would lead to increase in demand of quality real estate, with focus on affordable price and apposite locations. For example, the size of a Walmart store in US is anything between 50,000 square feet and 260,000 square feet, depending on the size of the immediate market that it is catering too. That is about as big as a 26-storey building with 10,000 square feet of shopping space on each floor, if you're looking at the upper end of the band -- or the horizontal equivalent of three football fields.
The story just begins from here. According to market experts, when 1,000 square feet of office space is rented or bought, it creates employment opportunity for at least seven people, five of whom on average are then in need of house. So there is a chain reaction here, as the demand for commercial space will also create an indirect demand for residential real estate thereby giving an overall impetus to the sector.
Additionally, as per the Press Note by Department of Industrial Policy & Promotion (DIPP), foreign retail investors need to invest at least 50 per cent of FDI in back-end infrastructure, which includes investment made towards manufacturing, storage, warehousing, agriculture market produce infrastructure and such like. All this would provide the necessary impetus to the cash-strapped real estate sector, besides helping improve the quality of back-end infrastructure in the country.
The flip side
However, initial investments could face roadblocks in the form of lack of commercial space in larger cities. As per the current policy, FDI in multi-brand is restricted to cities with a population of more than one million. Places such as Delhi and Mumbai, where first phase of investment may be planned, are already facing a real estate crunch and retail investors would face difficulties in getting land for setting up their stores.
Even ardent supporters of FDI in retail have agreed that it would be difficult for Wal-mart to open stores in place like Delhi because it would require several hundred thousand square feet of land, which is currently unavailable in the city. To circumvent this problem, Wal-mart could possibly replicate its US model by setting up stores in the city outskirts. However given that Indians are more used to ‘mom-and-pop’ stores and can also be easily dissuaded by the prospect of snaking their way through traffic snarls, especially during rush hour, to make routine purchases, it is highly unlikely that consumers would be willing to travel long distances to buy their weekly or monthly groceries.
The author is a Partner at J Sagar Associates. Views are personal