Sunday, April 4, 2010

Sprawling Retail Construction in India

Overbuilding of retail space is not limited to the North Atlantic countries. The situation is considerably worse in India. There, according to, mall vacancy is over 30 percent as of the end of 2009. (Also see Calculated Risk Blog’s take on this news story.) That is bad enough, but builders plan to nearly double the amount of retail space over the next four years, and this could lead to a vacancy rate over 50 percent, even with many projects being slowed down and delayed.

The reason retail vacancies are so high in India is apparently that owners have yet to cut rents. Unlike the United States, where effective retail rents have fallen by 30 percent in all but the choicest locations, retailers in India have to close stores to reduce their rent costs. Traffic jams are another issue unique to India leading to disappointing results.

The frustrating thing about this is watching the builders unable to stop their new building, even of projects that won’t start construction for another year or two, in the face of a faltering market. A few of the new projects are well-located and will succeed because of that, but more face such daunting obstacles that they many never open after they are built. Logically, these projects should be canceled, in spite of the loss that must be absorbed, yet in most cases, the building appears to be going ahead anyway.