Shubhranshu Pani, Managing Director – Retail, Jones Lang LaSalle Meghraj
A few questions need to be answered before one starts to build a mall. It is imperative to understand and answer these if one hopes to launch a successful, long-running shopping center.
Question 1. Why do you want to build a mall?
The mother of all questions - WHY A MALL? There can be various answers to this question - and to be fair, all of them could be correct. These answers point to the motive for building a shopping center, which would suggest the way forward:
1) Malls have been offering very good returns - Agreed. The first few shopping centers in the country have yielded excellent returns, giving the industry a model to yield good returns. Low land costs and high rentals used to offer good returns to any investor. Should this be the primary motive, there could be two possible ways to move forward.
A - Sell the mall as soon as it is leased, because a sold model offers quicker returns and doesn’t make you hold the property for a long term
B. Build a mall on strong fundamentals after answering all the questions below. This would mean develop a shopping center which can stand the test of time and can give healthy returns to all the key stakeholders.
2) The project I’m involved with (large, mixed use, 100 acres+) needs a component of retail for convenience to the inhabitants - Great. To add a dash of retail to a large mixed use development is a great idea, though the components of this retail may vary according to the needs of the consumer. However, it is not always necessary to develop a large shopping center when you are developing a large township. A mid sized convenio-retail format can also do the magic. Understanding the needs and fulfilling them is the key.
3) This neighborhood has great potential, with families who are longing for a good shopping/entertainment outlet - EXCELLENT. If the fundamentals suggest that the neighborhood has the potential to sustain a shopping center and there is a market gap which can be exploited, it offers the best possible rationale to develop a shopping center. The fundamental success factor for any shopping center is the catchment and the customer base. If they keep coming back for more, you have success.
Question 2. Who is going to shop here?
As already discussed, once the objective of developing the center is ascertained, it is important to understand the end customer. Indeed - who will come to shop here? Who they are? What are their income levels? What do they like to shop for? These are the basic questions that need to be answered. A shopping center is not built for the developer or the investor or the retailer, but for the customer who will come and shop there. Understanding them from a socio-economic perspective and expense pattern is the key.
Question 3. What are the alternatives this consumer has?
Understanding the existing markets and where people shop is critical. If one is to develop a new market, it should get the buy-in from the customers. Thus, it is important to know where they like to shop and what do they like to shop for. Understanding the current and future competition in the marketplace/micro market is extremely important.
Question 4. What is the market gap and where is it?
Going forward from the previous two questions, one has to ascertain the gaps in the market. What does this consumer need and want, and what is available to him in the existing markets? What are the products/categories, for which the catchment has to reach beyond their regular marketplace? What is the upcoming competition offering, and what are the gaps that still remain in the market? These questions give you a clear understanding of the product mix, which is absolutely essential for developing a center that will witness immediate buy-in from customers.
It also helps us answer the question of how large a shopping center should be. Unfortunately, we often decide on the size of the shopping center based on the size of the land parcel and the FSI/ FAR available on the land. This route may or may not give us an accurate assessment of the right size for a shopping center that a neighborhood requires.
Question 5. Why will the consumer come to my mall? How will I differentiate this project from other?
A very pertinent question. When there are existing marketplaces that the consumers are already used to and comfortable with available, why would they come to a new project? The aforesaid three questions should give the fundamental building blocks for this answer. If one knows the consumer and what they need and desire, and one knows what is available to them comfortably and what is not, it is easy for to identify the tenants and trade categories that will differentiate this center from the others. If the customer comes to the center for one of these needs, it is relatively simple for to make them come back for other things as well, providing that one has covered the fundamentals of the customer’s needs and desires.
The differentiation for a center can not only be from the perspective of the mix, but could also be on a conceptual level, where a center is planned differently and offers a similar mix in a different format/environment that customers appreciate. However, the answer to this can only come post operations, though a good understanding of the customers can give a fair idea in advance.
Question 6. Will this project be viable for retailers?
If one were to develop this center and be able to differentiate it from competition, bringing in customers, how much business will retailers be able to do - and how much can they afford to pay to the developer for the real estate? This is a million dollar question. We often decide the rentals for a particular shopping center before we do the math on how much revenue the retailer can generate from it. The reverse calculation makes more sense, since for the retailer, real estate is large cost and has a direct bearing on how much he can sell.
Most retailers are more than happy to pay a fixed percentage of sales as real estate cost, since it is that percentage that matters to their bottom lines. Even if the effective rental is higher than the current market rental, it is not an issue for them, as has been experienced by Prestige Group with their Forum Mall in
Question 7. With the given answers, is this project viable for me?
Once we know what retailers can pay (not in terms of a generic number, but calculated separately for every trade category) the developer can go ahead and answer the biggest question - if this is the size of the development, this the mix, this what the retailers can pay and this is, this ho one can differentiate the project and this the project cost - is this project viable?
Project viability can be evaluated at multiple levels and could be viewed in short-term and long-term. However, the viability and profitability levels vary between developers, and each has a different threshold.
Question 8. How will I fund this project?
Project viability analysis gives us the basic financials on raising capital for building the center. It is important to be as transparent and realistic as one can while pursuing financial institutions. The era of unrealistic valuations and financials is over, and the recent financial turmoil has made institutions more careful about how and whom they fund. An unrealistic expectation might not find many takers and can put a project at financial risk.
Evaluating different models for project financing is important. Today, we can avail of equity from both local as well as foreign institutions and private HNIs. Preferred equity could be raised in the form of mezzanine capital from various foreign institutional investors. Though there has been a crunch in the debt markets, with further stringent measures being deployed by financial institutions, this situation will not prevail for long and will eventually become easier.
Question 9. What are the fundamentals of design that need to be looked into?
Design is a very important part of the process. If there is haste or lags in the design, it can become almost impossible to rectify, and possibly very expensive. It is important for developers to look into the design of the shopping center very closely. The sequence of events, which are often mixed up, are:
- Creating a concept (not architectural, but conceptual)
- Creating a trade mix (a tenancy mix could be decided later, except for key anchors)
- Appointment of an appropriate architect – it is important to evaluate various architects before selecting one, primarily because of their past experience. There are a number of architects who are working in
- Concept design - it is not important that every shopping center have a huge glass façade or is 100% air-conditioned, or that it be enclosed. Based on the concept, intent and catchment, these could vary.
- Schematic design
- Detailed design, at which stage it is important to look at the softer issues of design as well. The softer issues would be palate, colours, rest rooms, waiting areas, seating, mother’s room, pantries, driver’s lounge, mall management office, help desks, etc. These soft issues are hygiene factors in any development, and if missed could have a negative impact on the customers’ experience. It is very important to understand that once the design falters, it is very difficult and expensive to rectify it. Spending time on planning is not time wasted, but time well invested.
Question 10. How do I ensure this project has longevity?
While one is busy planning the overall development and ensuring capital procurement and construction schedules, it is important to find answers to this very important question. Given that one can build in a good mix and plan the project well, what can one do to ensure that the project is successful in the long run? The answer is effective mall management. Mall management involves many functions, including housekeeping, parking management, tenant coordination, marketing management, regular improvements and upliftment of the center. Creating a good center is a good first step, but only effective mall management can ensure sustained customer flow into the project.
If these 10 questions are effectively answered and outputs implemented, we would definitely have a number of successful shopping centers sprouting up across the country.
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