How to Invest in Retail Real Estate?

The Retail Real Estate market in India is on a growth curve with foreign direct investment (FDI) in single-brand retail boosting demand in the segment. According to experts, the retail segment attracted an investment of over $700 million in 2016, which is expected to rise by 20 percent this year.

Despite the perception that e-commerce may adversely impact the retail business, the sector has had a track record of delivering solid returns. However, investors must remember that retail reality is far more complex as compared to the commercial real estate or residential segments. Before zeroing in on a retail property, a commercial real estate investor must evaluate the following factors:

Retailer

The retailer holds the key to any CRE investment as he determines an investor’s return and profits. This return may come in the form of rent, minimum guarantee or revenue share. On the other hand, the space leased by the retailer is determined by factors such as by the amount of sales he can expect in an area, consumer profile in the catchment area and accessibility of the retail center. The retail segment attracted an investment of over $700 million in 2016.

Developer

Investors must choose malls that are managed by a professional agency or by the developer. This is a safer bet as compared to strata sale malls where each unit is sold to an individual owner. Another viable option is a mixed-use project as the risk is hedged due to demand for residential options within the same project.

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Revenue model

There has been a gradual shift from only rent a few years ago to minimum guarantee to the latest trend of sharing revenue. In many malls, retailers prefer to pay a base rent and claim a share of the revenue. This allows retailers to bring down fixed costs but requires a larger appetite for risk from the investor.

Consumer spending

The largest underlying demand driver for retail real estate is consumer spending which, in turn, fuels retail sales and strategic expansion. The retail sector typically flourishes when the economy is doing well, unemployment is low and consumer spending is high.

The retail FDI policy is expected to usher in demand from international retailers in the coming years. With careful consideration of the above factors, investments in retail developments are bound to be profitable in the long run and fetch high returns for investors.

At Citadel, we offer commercial real estate advice and can help you find a suitable retail space to meet your unique needs. Contact us today!

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