Watching India's Slowdown From Its Malls

In May, Tyler Cowen rightly labeledthe sudden stall in India’s growth “one of the world’s biggest economic stories.” Its GDP, once bounding toward 10 percent, is now predicted to drop to 6.3% this year. That has serious implications for the region and global economy.

From Bangalore, it’s hard to see the stall. Everything is expanding. The city’s growth in recent years has been astounding, evident in the construction nearly everywhere. But the numbers suggest that other cities are witnessing the crawl. Reuters reports that the nation’s often surreal malls, in particular, are a nasty harbinger:

Nationally, retail vacancy rates are 20 percent and will likely rise to 25 per cent by 2014, according to property consultants Jones Lang LaSalle, as floor space in malls grows to 100 million square feet from 66 million now. More than 90 per cent of shopping in India is still done at unorganised one-off shops.
…”The crazy building boom in retail real estate is not going to come back,” said Kishore Bhatija, chief executive officer of InOrbit Malls, owned by developer K Raheja, which altered its plan for a 500,000 square-foot-mall in Vadodara to 400,000 square feet, and added a hotel instead.
“There is stress on the business model. It is getting a bit expensive. Real estate prices and construction costs are rising but the retail business is not growing enough to absorb this,” said Bhatija, adding that breakeven on projects is lengthening, in some cases to 10 or more years from seven in 2007-2008.
In fast-growing cities like Ahmedabad, Pune and the New Delhi region, vacancy rates at malls are more than 25 percent, according to property consultants Cushman & Wakefield, putting pressure on rents.

An extreme novice to Bangalore, I decided to trek over to its newest shopping complex, the roughly 820 thousand square foot Orion Mall, opened in Marchby the Brigade Group, a local developer. Behind the mall, with its five stories filled with mainly U.S. stores, is a guarded office building and modern apartment complex. A new Sheraton is rising right next door. The quiet, manicured space, complete with a man-made lake, contrasts immensely with the bustle on the street.

Inside the mall, the foot traffic was spare—uniformed officers nearly outnumbered the patrons. Mind you, it was a Monday morning. I’ve heard the mall is more popular than other new retail arrivals to the city. And Bangalore, one of the wealthiest cities in India, has had less of a mall problem than others. Cities like Ahmedabad and Pune are among the expanding, mid-sized metropolises expected to be the workhorses of India’s future growth. Consumer drop-offs there are not good signs.

Yet the threat to India, apparent in its malls, in its buildings built, is much more vivid in the things not built. The Economic Times details the looming private infrastructure fall: 

A just-released Crisil study, based on responses from 200 firms, confirms this. The study expects private sector capex to decline by Rs 72,000 crore or 35% in 2012-13. About Rs 35,000 crore of investments has been deferred and investment in new projects (just 25% of total) is hurting the most.
And close to 50% of the firms do not intend to start any new project this year. “The depth of the slowdown will be far deeper and longer than what was being expected,” says Chetan Ahya, economist (Asia-Pacific), Morgan Stanley.

(That decline is roughly $13 billion.) Charted, via the Times, the study reveals the trouble ahead:

Note that it’s not a shortfall in financing or demand behind this restrain, according to the investors. Instead, the sources come from politics in Delhi and Brussels. But as the Times documents, the investment retrenchment will fall swiftly on the job market, then the retail sector.

Nationwide infrastructure cutbacks would tangle up with Indian malls in another way, in the country where many roads are paved by private dollars. In Bangalore, the significant mall boom has prompted complaints of something I will surely be reporting on in the future: the horrendous traffic.

Source: www.forbes.com