Monday, September 22, 2008

Office bursts retail bubble

Office bursts retail bubble

Work more, shop less is the reality bite from realty.

More than 20 per cent of the shopping mall space that was to come up in the city over the next three years is being converted into office space as retail returns no longer match up to realty rates.

First, the promoters of Avani Signature, the swank Park Street tower that was meant to be Calcutta’s first exclusive mall for women, turned it into an office address after seeing the writing on the wall. Quite a few developers have followed suit, developing cold feet about commercial retail space. Ffiringi Bazaar, on the EM Bypass, has changed focus from shop to office.

The Gariahaat Mall, which flopped as a retail destination, is reinventing itself as an office building. Indiabulls, which has taken over Piramyd Retail, is wary about going ahead with its maiden project in the city, on Camac Street.

The latest high-profile conversion from retail to office space is DLF’s proposed Grand Mall in New Town, Rajarhat. It will be developed as a mixed-use property, to be called DLF Galleria, instead of a full-fledged mall.

“There is no denying the fatigue factor in retail at the moment. A lot of retailers may have ramped up their businesses too fast. On the other hand, the demand for premium office space has grown manifold,” said Ajay Khanna, the managing director of DLF Retail Developers Ltd.

Rent has shot through the roof, touching almost Rs 300 per sq ft at places like the new Elgin Road address, Forum Courtyard. “The thumb rule in apparel retail is that a store must earn a minimum of Rs 40-45 per sq ft every day to remain viable. This is not happening at many of the stores selling branded apparel in Calcutta right now because of high rent,” said Madhusudan Binani, a franchisee of brands like Benetton, Allen Solly, Adidas and Satya Paul.

With most retailers unable to afford high-rent addresses, builders are leaning towards the office-space segment, where demand outstrips supply. Other factors pegging back retail growth range from inflation to higher interest rates on plastic money. “There are only 250 to 300 brands to play around with, and many of them may have spread themselves too thin. With too many outlets in business, earnings per store have declined,” said Pradip Chopra of the PS Group.

Why does office space make more business sense than retail address? The arithmetic is simple: building an office tower in town costs Rs 1,000-1,500 less per sq ft than a retail project, and the tenants are also willing to pay higher rent.

The demand for Grade A, non-IT office space in the city is rising fast. “Earlier, people were house-proud; they are now becoming office-proud as well. Over the past decade, nobody had concentrated on creating small-format, quality office spaces,” said Khanna of DLF.

Realty consultants endorse the switch, saying it makes sense for builders to alter the use of their properties when market conditions change. “But this change does not imply that retail has no future. The problem is only with smaller malls, or too many malls in the same area, or malls that have not been positioned well,” said Abhijit Das, the managing director (Calcutta) of Jones Lang LaSalle Meghraj.