Wednesday, January 03, 2007

Retailers and real estate developers prepare to battle it out

The Economic Times reports that India’s retail boom is set to create a tug-of-war between larger retail chains and real estate developers, as retailers’ requirements for real estate grows and they seek to reduce margins on real estate. To balance this scenario, developers are forming revenue sharing agreements with retailers. Traditionally, most leases are long term leases, generally up to 9 years with increases of 20% only after 3 years. Newer agreements are for shorter periods and are revised by 10-12% annually.

Raman Mangalorkar, principal, AT Kearney, said that “In the long run, a retailer operating in the value retail business cannot afford its real estate cost to be in the excess of 4-5% of total sales. In fact, globally this standard is just about 3%.” Large retailers are focusing on the suburbs in the larger cities due to high real estate prices. In smaller cities and Tier I and Tier II cities, large retailers will still be able to set up in prime locations.

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