Resurgent Retail - Powered by Rising Domestic Consumption

RESURGENT RETAIL POWERED BY RISING DOMESTIC CONSUMPTION SEPTEMBER 2024

04 Indian Retail: Ready for Take-off 06 Drivers of Retail Resurgence Domestic Consumption 18 Real Estate Response & Readiness Discretionary Spending Global Retailers Eye India Supply-Side Challenges TABLE OF CONTENTS

Rise of Highstreets and Office-Retail Complexes

The Road Ahead 26

RESURGENT RETAIL

Global retail brands are eager to enter

and strong macroeconomic indicators. the Indian market due to high GDP growth

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Cushman & Wakefield

INDIAN RETAIL: READY FOR TAKE-OFF

The journey of the Indian economy from under 4 trillion currently to USD 5.0 trillion by 2027 is going to be an exciting one, particularly for the growth of consumption-driven sectors such as retail. India’s per-capita GDP is also expected to rise to USD 4,000 by 2030, placing the economy closer to that of other upper middle-income economies as defined by the World Bank. In this report, we highlight the significant transitions that the consumer spending will undergo driven by rise of the discretionary spend basket and experiential retail. Some glimpses of these shifts are already visible in the current retail landscape. Recent household survey by the government shows that urban India’s spending on discretionary items has increased from 27% in FY2011-12 to about one-third in FY2022-23, while spending on essentials has decreased. Additionally, consumer spending patterns are shifting towards experiences rather than essentials. Monthly spending on food deliveries and credit card usage have surged, reflecting higher consumer confidence and discretionary spending. Gradually, Indians are seen spending more on travel, vehicles and other premium consumer durables. International retailers find India’s retail market growth story highly attractive and many of them have plans to enter the market. In the recent past, the retail ecosystem has become more attractive to new entrants given the government initiatives on relaxation of FDI norms, a robust digital payment ecosystem and improved infrastructure and real estate. The need of the hour is to upgrade the pace of quality retail developments, which has been very slow so far. For the most recent eight-year period, we have witnessed an average of 2.5 MSF of Grade-A mall developments commence operations. India’s Grade-A retail mall inventory of 61 MSF across top-8 cities translates to a mere 0.5 SF of Retail Space Per Capita (RSPC), which is much lower even when compared with smaller countries such as Indonesia, the Philippines, and Vietnam. This low mall penetration is the reason why vacancies in existing Grade-A malls are at its lowest level, across top real estate markets. For the moment though, highstreets and Office-Retail Complexes (ORCs) are rising to the occasion and providing the desired space for retailers willing to expand their footprint. More than 70 ORCs have commenced operations in the last eight years, while prominent highstreets across major cities have seen rental premium overshoot the pre-COVID peaks. We foresee private equity interest in retail real estate to rebound, with more joint ventures likely between investors and developers in coming years.

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RESURGENT RETAIL

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Cushman & Wakefield

DRIVERS OF RETAIL RESURGENCE The world’s fastest growing economy is soon forecasted to touch USD 5.0 trillion in size, thereby becoming the third largest economy in the world by 2027. That’s a significant USD 1.2 trillion leap from the USD 3.9 trillion economy that India is estimated (2023F, IMF) to be today. In the past, it took India over seven years (2017-23F, IMF) to achieve that sort of growth in economic size.

Domestic Consumption on the Rise

This journey towards becoming 5 trillion economy is going to be filled with opportunities of growth across multiple sectors, particularly in consumption-oriented sectors such as Retail. India’s per-capita GDP (or income) is estimated to rise sharply during these forecasted period, with some leading market analysts indicating at USD 4,000 level in next six years until 2030.

Forecasted USD 5.0 trillion economy to hurl India closer to upper middle-income economy

6.0

4,000

3,500

5.0

3,000

4.0

2,500

3.0

2,000

1,500

2.0

1,000

GDP per-capita (USD)

1.0

500

- GDP, in trillion dollars (curr. prices)

0

2022f

2023f

2024f

2025f

2026f

2027f

2020

2021

2012

2013

2014

2015

2016

2017

2018

2019

GDP per capita, Current Prices

GDP (in trilions), Current Prices

Source: IMF WEO October 2022 database

At USD 4,000, India’s per-capita income is expected to come within reasonable distance from where the upper-middle income nations start (USD 4466, onwards), as per income levels defined by the World Bank. The foreseeable journey of India becoming a middle-income country over the next few years is exciting for the retail real estate segment, as higher disposable incomes would entail higher spends on discretionary items and customer experiences, an area excelled by physical retailing formats.

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RESURGENT RETAIL

Discretionary Spending on the Rise

Most recent survey done by the National Sample Survey Organization (NSSO) of Indian households, released early this year, reveals a pattern where Urban India’s spending on discretionary items has increased from merely 27% in FY2011-12 to about one-third as of FY2022-23. In contrast to that, the share of expenditure on essential items has reduced, clearly highlighting the impact from rise in incomes and improving lifestyles.

Shares of essential & discretionary items in monthly per capita expenditure (MPCE) in urban India, 2011-12 & 2022-23

0% 10% 20% 30% 40% 50% 60% 70% 80%

73%

67%

33%

27%

2011-12

2022-23

Share of expenditure on essential items (%)

Share of expenditure on discretionary items (%)

Source: NSSO Household Survey 2022-23

Discretionary items include packaged beverages and processed food, household consumables, entertainment, consumer services, durable goods, etc. Essential spending on the other hand, includes the purchase of food products, medical expenses, fuel, light, conveyance, rent, footwear etc., and that seems to have declined materially. Separately, data published by the Ministry of Statistics and Program Implementation (MoSPI) also indicates that the consumption pattern of Indians is changing rapidly in favor of experiences as opposed to value consciousness. For instance, there has been a decline in home cooking among mid-to-high income category families in last one decade, as monthly urban spending on food deliveries has risen to INR 971 per head in FY23, compared with a mere INR 60 per head observed earlier.

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Cushman & Wakefield

The overall spend through credit cards has nearly

Credit card spending has been on a steep rise, making us believe that Indian consumers’ confidence in a brighter economic outlook is high. The overall spend through credit cards has nearly tripled to INR 18.31 lakh crore in merely three years until FY2024. Before that, it had almost doubled in five years to INR 9,744 in FY2022. Interestingly, if we investigate this data more closely, the average spend per transaction on cards is also rising, growing consistently at 11-13% for the last three years to INR 5,142 as of FY2024. Strengthening consumer spending is beneficial for the growth of organized retailers, as the rising usage of credit cards certainly highlights the consumers’ indulgence in experiential and discretionary spending. FY2024. Before that, it had almost doubled in five year to INR 9,744 in FY2022. tripled to INR 18.31 lakh crore in merely three years until

Credit card transactions

10,000 12,000 14,000 16,000 18,000 20,000

6,000

18,311

5,130 4,914

5,000

5,142

14,323

3,575

4,000

9,744

3,274 3,430 3,353

3,078 3,029

3,000

6,333

7,371

0% 2,000 4,000 6,000 8,000

INR

6,079

2,000

4,626

INR Bn

3,312

2,437

1,000

0

FY 2015-16

FY 2016-17

FY 2017-18

FY 2018-19

FY 2019-20

FY 2020-21

FY 2021-22

FY 2022-23

FY 2023-24

Average spend per transaction (INR)

Amount of transactions (INR Billions)

Source: Reserve Bank of India

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RESURGENT RETAIL

Leisure and high-value purchases – a swivel of experiential/discretionary spends

The data on travel for leisure strongly indicates that Indians are spending more on gaining experiences as incomes rise. Air passengers’ volume growth in India has not just recovered to pre-pandemic levels in the last two years, but it is currently at a historic high. Across major airports, as per the data from the Airports Authority of India (AAI), the last fiscal year 2023-24 saw 376 million passengers traveling, beating the previous highest volume of 345 million in FY2018-19. While international air travel has recovered to levels seen in the pre-COVID years, the bulk of this growth has been observed from domestic travelers. The volumes for this segment have reached a new peak of 307 million passengers. This makes India the third largest domestic airline market in the world, after the USA and China, as highlighted by a leading global travel data aggregating company OAG (www.OAG.com).

Domestic passenger growth faster than international passenger

100 150 200 250 300 350 400

376

345

341

327

309

265

307

189

275

275

270

243

206

105 115

167

0 50

59

65

69

67

57

70

10

22

Passengers (in Millions)

2016-17

2017-18

2018-19

2019-20

2020-21

2021-22

2022-23

2023-24

Financial Year

Domestic

International

Source: Airports Authority of India

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Cushman & Wakefield

Passenger Vehicle (PV) sales have touched an all-time high of 4.2 million cars during the last fiscal year 2023-24, making it two consecutive years of record volume growth. If we delve deeper into this data, premium variants such as the Utility Vehicles (UV) segment – typically, higher-priced variants within the overall PV segment – have become the most dominant segment in the last two years, crossing 50% market share compared to ~30% in the pre-COVID period. A rising base of young and aspirational consumers with higher disposable incomes is the primary reason attributed by industry experts to the rise in the sale of UVs in India. the most dominant segment in the last two years, crossing 50% market share compared to ~30% in the pre-COVID period. Utility Vehicles (UV) segment – typically, higher-priced variants within the overall PV segment – have become

Passenger vehicle (PV) sales at all-time high; higher-priced utility vehicles (UV) soar higher

0 10% 20% 30% 40% 50% 60% 70%

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

59%

52%

49%

39%

34%

28% 28% 28%

0 500

3,048

3,288

3,377

2,774

2,711

3,070

3,890

4,219

Passenger Vehicles Sold (in ‘000s)

Share of Utility Vehicles in PV sales (%)

2016-17

2017-18

2018-19

2019-20

2020-21

2021-22

2022-23

2023-24

Financial Year

Source: SIAM data

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RESURGENT RETAIL

Sales of iPhones have soared in the last 4-5 years to a record high volume of 10 million in 2023, going by the iPhone shipments to India by Apple Inc. Typically, the cost of iPhones is relatively much higher in India, thereby considered as a premium smartphone compared to other variants available in the market. India’s young population wants aspirational products, and it appears like the iPhone is on top of that list. Consequently, India is now counted amongst top-5 countries for sale of iPhones in the world, and available market estimates suggests it will soon become third largest in another 2-3 years.

No. of iPhones shipped in India by Apple (in Millions)

2015 1.8

2016 2.5

2017 3.2

2018 1.7

2019 1.9

2020 3.2

2021 5.4

2022 5.9

2023 10

2024F 12

Source: Counterpoint Research data

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Cushman & Wakefield

India is now counted amongst top-5 countries for sale of iPhones in the world.

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RESURGENT RETAIL

The “urgency for global retailers to enter and expand” in India (as measured through the Time Pressure index within GRDI) is very high.

Global Retailers Eye India

Given the steep rise in incomes and high-value spending observed in India over the last few years, India’s attractiveness to global retailers has increased. The most recent version of the biannual AT Kearney’s Global Retail Development Index (GRDI) of 2023 report has placed India as the number one destination in market attractiveness for global retailers amongst 44 global markets/countries. India has consistently featured among the top 2 most attractive retail destinations as per the GRDI since 2016. Interestingly, the report states that the “urgency for global retailers to enter and expand” in India (as measured through the Time Pressure index within GRDI) is very high given the macroeconomic growth, income increase, steep rise in discretionary spending, enabling policy environment, and rapidly expanding infrastructure.

Pressure to enter India is high on Global retailers (AT Kearney’s GRDI reports - Time Pressure index; 100=high, 0=low)

100

100

88.5

88.8

82.7

58.8

43.4

2012

2014

2016

2018

2020

2022

2024

Source: AT Kearney’s GRDI Index (2014-2023) reports

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Cushman & Wakefield

Primary reasons for India’s attractiveness to global retailers in the last 5-6 years:

1 2 3

Digitization of payment systems and nationwide roll-out of GST enables ease of doing business for many retailers while enhancing the customer experience at the store.

Rising incomes and changing lifestyles are equally matched by improving physical infrastructure and real estate that helps augment retailing experiences.

Relaxed FDI policy around single brand (100% liberalized) and multi-brand retailing (51% allowed).

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RESURGENT RETAIL

This high attractiveness has caught the eye of many global brands. In the last 6-7 years, many brands have planned to enter India to partake in the growing consumption story. Some of the leading global retail chains that entered India during the last 7 years include:

Popular International brands that entered India in recent years

Armani Exchange, Cole Haan, Heatwave, Muji, Massimo Duti, Neil Barett 2016

MiNISO, Kate Spade 2017

IKEA, American Eagle, Ted Baker 2018

Under Armour, Go Sport, Replay, Hummel, Kenneth Cole 2019

7Eleven, Philipp Plein*, & Billionaire * 2021

Valentino, Tim Hortons, Popeyes, & McLaren 2022

Balenciaga, Apple, Pret A Manger, Pottery Barn Kids, Brioni, Laderach, Ligne Roset, Kiabi* 2023

Nars Cosmetics Maison Margiela, Time Vallée, Charles Tyrwhitt, Next*, & Laura Mercier* 2024

Source: various media sources * Brands have entered India through an online presence with marketplace model or individually

Present

No. of Global Brands Entering India

12 Pre-COVID yearly average

01 2020 2023 24

2021 03 2024E 25

2022 11

Source: IBEF, other media sources

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Cushman & Wakefield

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RESURGENT RETAIL

REAL ESTATE RESPONSE & READINESS

India has a total inventory of Grade-A malls to the tune of 61 million square feet (MSF) as of end-2023 across its top 8 real estate markets (excluding the retail assets on the verge of becoming obsolete, i.e. Grade-B malls). The pace of delivery of quality assets has been slower than desired, according to the recent supply addition data. Over the last eight years until 2023, the new completion or commencement of Grade-A malls in India’s annual average hovered around 2.5MSF. This means, merely 20 MSF of Grade-A malls got added in the last eight years, despite consumer demand consistently growing stronger during the same period. Supply-Side Challenges

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Cushman & Wakefield

...mere 20 MSF of Grade-A malls got added in the last 8 years, despite consumer demand consistently growing stronger during the same period.

Inventory of Grade-A Malls (in MSF) in India across top-8 CRE markets

+18 MSF

+10 MSF

+10 MSF

78.0

73.2

70.2

64.0

60.7

56.1

54.1

50.1

51.1

47.2

43.3

40.0

2016

2017

2019

2021

2018

2022

2023

2020

2027F

2025F

2024F

2026F

Source: C&W India Research

Though improving, the retail space per-capita (or RSPC) is under 1.0 across all major cities, including for markets such as Delhi-NCR and Mumbai where more than 50% of the Grade-A asset concentration lies. India’s RSPC compares poorly even when compared with relatively smaller nations in South Asia such as Indonesia, Philippines, Thailand, or Vietnam. Most of these economies have RSPCs above 1.0, with major cities enjoying a much higher number.

Grade-A Retail Space Per Capita (SF/Capita)

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025F

2026F

2027F

Bangalore Chennai

Delhi NCR Hyderabad

Mumbai

Pune

Pan India

Note: RSPC = Grade-A mall space (in SF) divided by total population

Source: C&W India Research

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Cushman & Wakefield

Mall vacancies have remained below the 9% mark over the last five years, with superior-grade assets (i.e. assets backed by superior asset management practices) enjoying an even lower vacancy rate of under 4%. In the near future, we foresee relatively healthier supply addition of Grade-A malls, as seen through our forecasted supply numbers through the 2024-27 period. Consequently, many of the top cities in India will see their RSPC improve a few notches, enabling retail experiences to reach a larger share of the population. Currently there is massive tightness within the existing Grade-A malls to accommodate newer brands entering or expanding within the top 8 cities. Mall vacancies have remained below the 9% mark over the last five years, with superior-grade assets (i.e. assets backed by superior asset management practices) enjoying an even lower vacancy rate of under 4%.

Grade-A and superior malls vacancy rates (%) comparison

10.0% 12.0% 14.0%

11.6%

9.4%

8.9%

8.9%

8.5%

7.9%

7.6%

8.0%

0.0% 2.0% 4.0% 6.0% 8.0%

6.9%

3.5%

3.8%

4.1%

3.7%

2.3%

2.6%

2.8%

2016

2017 2018 2019 2020 2021

2022 2023

Source: C&W India Research

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RESURGENT RETAIL

The aftereffects of the prevailing tightness in the retail real estate market are visible. Major malls that commenced operations in 2023, saw a high level of pre-commitments and, therefore, enjoyed extremely low vacancies of 4%-17% within a few quarters of launch. Need of the hour is to add more Grade-A mall supply

Vacancy Rate at Commencement of Operation

Quarter of Completion

Year of Completion

Mall Name

GLA (SF)

Pacific Premium Outlets

Q1

2023

220,000

10%

Palladium Mall - Ahmedabad

Q1

2023

750,000

15%

Phoenix Mall of Millenium

Q3

2023

1.1 Million

14%

Lulu Manjeera

Q3

2023

450,000

12%

Phoenix Mall of Asia

Q4

2023

1.2 Million

17%

KOPA Mall

Q4

2023

325,000

10%

Jio World Plaza

Q4

2023

475,000

4%

Source: C&W India Research

As the desired quality of spaces are in short supply the brands find this discomforting and gives the retail landlords greater leverage while negotiating on commercials. A comfortable situation for all stakeholders would be to have a more balanced or neutral market scenario and, for that, new supply needs to be added at greater frequency. For instance, if the top 8 cities combined were to reach an RSPC of 1.0 (equivalent to that prevalent in Indonesia currently), there is a need of an additional 55 MSF of quality Grade-A malls. Here, it will be pertinent to note that India’s per-capita income is likely to equal that of Indonesia’s current income over the next 4-5 years. Therefore, we believe the opportunity for Indian mall developers to deliver this quantum would be approximately 4 years – i.e. ~12.5 MSF per annum of new supply addition. It could vary across different cities, with some cities where the under-penetration is severe wanting to add more supply more heavily.

India Grade-A Mall Supply Analysis (for top-8 cities; data in million SF)

61

55

18

Existing as of 2023

2024F - 2027F

If RSPC=1; desired supply 2024-27

Source: C&W India Research analysis

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Cushman & Wakefield

If the top 8 cities combined were to reach an RSPC for 1.0 (equivalent to that prevalent in Indonesia currently), there is a need of an additional 55 MSF of quality Grade-A malls.

For 55 MSF to be delivered over the next five to six years, when India’s per-capita GDP is expected to reach closer to that of Indonesia’s recent year GDP per capita, the top-8 cities will need to collectively add Grade-A malls at the rate of 9 to 11 MSF per annum. This is nearly 3.5-4.5X of the capacity addition over the last eight years. Such a quantum of builds would necessitate all stakeholders within the retail real estate fraternity (i.e. developers, institutional investors, and REITs) to jointly deploy resources. At the same time, government should play an enabling role to facilitate ease of doing business.

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RESURGENT RETAIL

We believe our estimation of new mall space supply needed, is a conservative one as this analysis does not account for the risk of obsolescence of the asset and its withdrawal from the current Grade-A mall footprint. Within the Grade-A universe that exists today, our preliminary observations suggest that approximately 9-10% inventory could face risk of becoming obsolete in the medium-term as consumer preferences are evolving very fast and some malls may not have the capacity to accommodate dynamic changes. Not surprisingly, therefore, we are noticing a revival of private equity interest in retail real estate after a dip in sentiment seen in-and-around the COVID period. Interest of institutional investors in this asset class is likely to rise, and possibly it will result in more joint development agreements between PE investors and mall developers in the near future.

Private equity investments in retail real estate (USD Mn)

1000 1200 1400

1,156

785

876

200 400 600 800

390

269

297

160

17

0

2015 2016 2017 2018 2019

2020 2021 2022 2023

-200

Source: C&W India Research analysis

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Cushman & Wakefield

Rise of Highstreets and Office-Retail Complexes

Constraints w.r.t. availability of space within the Grade-A mall universe across top-8 cities have proven to be advantageous for highstreets and Office-Retail Complexes (ORCs) across these cities. Brands prefer to either be in quality Grade-A malls or chose to be in prominent highstreets and ORCs as the latter provides high visibility and access to niche customers with good spending capacities. Given the rise in brands wanting to enter and expand across major cities, highstreets have played an important role in offering high visibility locations. Consequently, rental premium across most major highstreets in India have risen over the years. Data suggests that prominent highstreets across the top real estate markets in India have surpassed the peak rentals seen during pre-COVID period (mostly in year 2019). Some of these highstreets have now compare with the priciest ones in the world, particularly Khan Market (New Delhi), Connaught Place (New Delhi), and Linking Road (Mumbai), as per Cushman & Wakefield’s global report, Main Streets Across the World 2023”.

Major high-streets across cities have seen rents cross pre-COVID peaks (INR per SF, per month)

1,000 1,200 1,400 1,600

Q2-2024 Rental

Pre-COVID Peak rental

0 200 400 600 800

C.P.

F.C. Road, Pune

Khan Market, Delhi

Delhi

Source: C&W India Research analysis

Park Street, Kolkata

Kemps Corner, Mumbai

Linking Road, Mumbai

Pondy Bazar, Chennai

Banjaa Hills,

Brigade Road, Bangalore

Indira Nagar, Bangalore

Hyderabad

In parallel, we have been observing strong emergence of Office-Retail Complexes across the top-8 real estate markets in India over the last 7-8 years, until 1H-2024. More than 70 prominent ORC projects have been delivered during this period, and most of them have been successful in attracting quality retail tenants.

Number of new Office-Retail Complexes (ORCs) commencing operations (Cumulative addition over last 8 years)

20 30 40 50 60 70 80

0 10

2016 2016 2017 2018 2019 2020 2021

2022 2024

Source: C&W India Research analysis

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RESURGENT RETAIL

THE ROAD AHEAD The consumption pattern of India is anticipated to change faster going forward as the national income gradually comes closer to that of middle-income nations over the next few years. This makes India an attractive retail destination and there is an urgency among global retailers to enter the country and spread their presence. While this sounds positive for retail real estate landlords currently, the under-penetration of Grade-A malls in India today could be a restricting factor for global retailers. Requirement to build top-quality mall assets is high as nearly all major Indian cities experience weaker penetration – measured through retail space per capita (RSPC) – even when compared with South Asian countries such as Indonesia, the Philippines, or Vietnam. Mushrooming office-retail complexes (ORCs) and prominent highstreets across major Indian cities have meanwhile provided some relief as many retailers find these spaces attractive from a high visibility and customer proximity perspectives. Consequently, rental premiums have peaked across the most prominent high streets. If India were to reach 1.0 RSPC by 2027 (the level where Indonesia is currently given its income), mall developers would have to build approximately 55 MSF over the next 4 years. The speed of delivery required will be 3.5-4.5X higher than the speed with which Grade-A malls were getting delivered so far. These are conservative estimates, as these do not factor-in the risk of obsolescence. We estimate there is another 9-10% stock of Grade-A malls that would turn obsolete in the medium term. Adding quality assets at this scale and speed necessitates all stakeholders within the retail real estate fraternity including developers, investors, REITS among others to jointly deploy resources, the government must play an enabling role to facilitate ease of doing business.

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Cushman & Wakefield

India is poised to be a key growth engine for the global economy, supported by robust macroeconomic indicators and a large consumer base.

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AUTHOR

Suvishesh Valsan Sr. Director, India Research suvishesh.valsan@cushwake.com

RESEARCH CONTRIBUTIONS

AM Lakshmi Assistant Manager, Research am.lakshmi@cushwake.com

Shubham Sherugar Assistant Manager, Research shubham.sherugar@cushwake.com

BUSINESS CONTACT

Saurabh Shatdal Managing Director – Capital Markets & Head Retail saurabh.shatdal@cushwake.com

About Cushman & Wakefield

Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in nearly 400 offices and 60 countries. In 2023, the firm reported revenue of $9.5 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award-winning culture and commitment to Diversity, Equity and Inclusion (DEI), sustainability and more. For additional information, visit www.cushmanwakefield.com.