With declining demand making commercial projects increasingly unviable, a host of developers are busy converting mall projects into residential ones.
Rituraj Verma, director of retail services at Knight Frank India, a global property consultancy, estimates that about 25 out of the 375 mall projects planned two years ago may see the light of day in the next four to five years. “Developers say they will get only half the value if they go ahead with malls instead of residential projects,'' he adds.
That explains the rush among developers to convert their projects. For instance, Mumbai-based Orbit Corporation has decided to convert its 250,000 square foot (sq ft) Hafeez Contractor House in Lower Parel into a residential project. Its Andheri project will also be turned into a residential complex.
Mumbai is not the only city to see this trend. Prozone Liberty, the mall development joint venture between Provogue and UK's Liberty International, plans to follow suit. Prozone is planning to convert a part of its mall projects in Jaipur and Indore residential development owing to lower demand for mall spaces in smaller cities.
Bangalore is seeing the same trend. A month back, the TTK Group said in a notice to the Bombay Stock Exchange that it was changing its plan for a mall project on a 6.3 acre site in Dooravani Nagar, Bangalore, and was planning to set up a residential project instead.
Dhiraj Shah of West Pioneer Properties says the company initially wanted to build malls and lease them out. “We changed our plans after the slowdown in the retail sector,” Shah says. The London Stock Exchange’s AIM-listed company wanted to develop a 726,000 sq ft mall in Kalyan on the outskirts of Mumbai. The mall, built on a part of the land, is named Metro Junction but the company is now building Metro Residency as well on the remaining area.
Estimates by property consultant Jones Lang LaSalle Meghraj (JLLM) suggest that retail rents have fallen up to 50 per cent across the country in the last one year.
The country has a ready supply of 38 million sq ft of retail space and around 30 million sq ft is expected to hit the markets in the next two years. The absorption of retail space is 4 to 5 million sq ft every year leaving a huge supply-demand mismatch, JLLM says.
Real estate consultancy Cushman & Wakefield gives the break-up of the fall in retail rentals. Mumbai saw the sharpest decline in rental values for both malls (about 42 per cent in Mumbai suburbs) and main streets (about 38 per cent in locations such as Colaba Causeway).
In the National Capital Region, the main street location of Greater Kailash saw a 25 per cent decline in rental values, while mall rental values in Noida dropped 17 per cent. Ahmedabad saw a serious downturn in rental values in malls and main streets, with corrections ranging from 20 to 36 per cent over the last quarter.
Though the housing sector also took a few knocks, the impact was much less. In any case, demand has revived, with several developers cutting prices and interest rates looking more benign.
According to government estimates, the country is facing a shortage of 20 million units, especially in middle and lower income segments – which has caught the fancy of developers such as DLF, Unitech and Omaxe among others.
Costs have also played a part. Malls require a construction cost of Rs 3,000 a sq ft; residential projects Rs 1,500 to Rs 1,800 a sq ft.
Besides, developers pre-sell homes and finance their construction through these advances. Mall developers, by contrast, have to raise own funds and earn returns after they lease space.
