India real estate sector - Feel better with retail therapy ::Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


India real estate sector
Feel better with retail therapy
Event
 We attended the two-day ‘Real estate Investment Forum’ held in Mumbai last
week. In this note, we focus on the Retail real estate market. These are based
on views expressed by participants in various panel discussions and one-onone
conversations.
Impact
 Physical market trends remain strong: The session on retail real estate
was one of very few sessions across two days where the mood was not
depressing. Developers, consultants and retailers alike had good reason to
cheer. Same store sales growth has been clocking in at an average of over
10% (range of 8-15%). Leasing momentum has been robust and strong sales
have led to a higher revenue share for landlords. Pre-leasing trends also
remain strong. Importantly, the mind-set of developers is shifting post the
2008 crisis. The session focussed on mutual profitability of retailers and
landlords and delivery of a good experience to the customer.
 Positive outlook on rents: The biggest change in the retail sector between
2007 and 2011 has been the emergence of the revenue share model. Many
leases are now structured as a minimum guarantee plus revenue share
(ranging from 3% for hypermarkets to an average of 15% for small retailers).
Base rents have increased around 15-20% from the trough in 2008 in good
locations. The revenue share model has driven a far higher growth in effective
rents due to strong same store sales growth. Notably there was consensus
across players that rents for good quality shopping centres will not fall.
 Debate on revenue share calculation: There was a very animated (and
entertaining) exchange on how rentals would be calculated and monitored.
Not all retailers are comfortable sharing access to their billing IT systems. In
addition, consumers use cash to pay for over 75% of transactions- especially
in smaller stores. However this seems to us as a minor teething issue which
has been ironed out in the past and is unlikely to derail growth.
 Exit options a long term concern: We spoke to a few investors, consultants
and advisors during the conference. The encouraging aspect is that some
capital raised in 2009-2011 is still un-deployed. However investors are finding
it tough to invest due to the fluid scenario of regulations, policy inaction and
exit options. Returns from investments made in 2005-2008 look great on
paper. However investors conceded that one long term concern is the
struggle to find vehicles to exit. This is because the REIT market has not
evolved as expected. Strata sales to HNIs erode returns. Effective LTVs in
lease rent discounting have also fallen sharply. Banks now find it tougher to
forecast cash inflows due to a shift to the revenue share model.
Outlook
 Be selective and asset specific: Overall trends are very strong. But we
believe that sustained performance will be driven by differentiation on
location, mall design and tenant mix. Phoenix Mills stands out on these
parameters. We re-iterate our Outperform rating on Phoenix Mills.