10 Things To Consider before Building A Mall: Shubhranshu Pani, MD – Retail, Jones Lang LaSalle Meghraj

Let us start by saying that one needs to answer a few questions before one starts to build a mall. It is imperative to understand and answer these questions, if you want to build a successful, long running shopping centre.

Why do you want to build a mall?
The mother of all questions: WHY A MALL?

There could be varied answers to this question and to be fair, all of them could be correct. The only thing this answer tells us is the motive for building a shopping centre, which would suggest the way forward for these centres. Let us discuss a few of the possible answers.

No doubt, it is been offering very good returns. The first few shopping centres in the country have yielded excellent returns and have given the industry a model to yield good returns. Low land cost, 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. 1. Sell the mall as soon as it is leased, because a sold model, offers quicker returns and does not make you hold the property for long term, to answer questions of retailer viability. 2. Build a mall on strong fundamentals after answering all the questions below. This would mean developing a shopping centre which can last the test of time and can give healthy returns to all the key stakeholders.
This development (large mixed use 100 acres) needs a component of retail for convenience to the inhabitants. To add a dash of retail in a large mixed use development is a great idea, though the components of this retail may vary according to the needs of the consumer. It is not always necessary to develop a large shopping centre when you are developing a large township. A mid sized convenio retail can also do the magic. Understanding the needs and fulfilling them is the key.

This neighborhood has great potential, with families, who are longing for a good shopping / entertainment outlet. If the fundamentals suggest that the neighborhood has the potential to sustain a shopping centre and there is a market gap which can be exploited it offers us the best possible rationale to develop a shopping centre. The fundamental success factor for any shopping centre is the catchment and the customer base. If they keep coming back for more, you have succeeded.

Who is going to shop here?
As discussed above, once the objective of developing the centre is ascertained, it is important to understand the end customer. Who will come to shop here is the key question. 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 centre is not built for the developer, investor, or the retailer, but for the customer, who will come and shop there. Understanding them from a social economic background and expense pattern is the key.

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. Understanding the current and future competition in the market place / micro market becomes extremely important.

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 & what is available to the consumer in the existing markets. What are the products / categories, for which the catchment has to go far / outside of their regular market place? 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 one to develop a centre, which shall get an immediate buy-in from the customers.

It also helps us answer the question of how large a shopping centre should be. Unfortunately we often decide on the size of the shopping centre based on the size of the land parcel available and the FSI/ FAR available on the land, which may or may not give us an accurate assessment of the right size for a shopping centre that neighborhood requires.

Why will the consumer come to my mall? / How will I differentiate this project from other?

This is a very good question. When there are existing market places available, which the consumer is already used to and comfortable with, then why would they come to a new project? The aforesaid three questions should give you the fundamental building blocks for this answer. If you know the consumer and what they need / desire and you know what is available to them comfortably and what is not, it is easy for us to identify the tenants / trade categories, which shall differentiate this centre from the others. If the customer comes to the centre for one of its needs, it is relatively simple for us to make them come back for other things as well, should you have covered the fundamentals of the customer’s needs and desires.

The differentiation for a centre could not only be from the perspective of the mix, but could also be on a conceptual level, where the centre is planned differently and offers a similar mix, in a different format / environment, which is appreciated by the customers. The answer to this though can only come post operations, though a good understanding of the customers can give you a fair idea of the same well in advance.

Will this project be viable for the retailer?

If we were to develop this centre and be able to differentiate it from competition and be able to bring in the customers, how much business will the retailers be able to do and how much can they afford to pay to the developer for the real estate? This is a million $ question. We often decide the rentals before we do the math on how much revenue can the retailer generate from the particular shopping centre, though the reverse calculation makes more sense, since for the retailer, real estate is large cost and has a direct bearing on how much they can sell.

Most of the retailers are more than happy to pay a fixed percentage of sales as real estate cost, since its that percentage, which 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 Prestige Group with their Forum Mall in Bangalore. If the rentals constitute a very high percentage of their sales, the viability of the store drops and chances are that the retailer either would walk out of the centre or shall try and renegotiate the same with the developer. Eitherways the one who is affected the largest is the developer, who has to pay the brunt of losing retailers or renegotiating to lower rentals.

With the given answers, is this project viable for me?

Once we know what the retailers can pay (not a generic number but separately for each and every trade category) the developer can go ahead and answer the biggest question, which is, if this is the size of the development, this is the mix, this is what the retailers can pay, this is how we shall differentiate the project & this is the project cost, is this project viable?

Project viability can be evaluated at multiple levels and could be reviewed in short term and long term. The viability and profitability levels though vary between developers and each one has a different threshold for the same.

How will I fund this project?

Project viability analysis gives us the basic financials for raising capital for building the centre. It is important to be as transparent and realistic as can be while pursuing financial institutions. The era of unrealistic valuations and financials are slowly winding up and the recent financial turmoil has made institutions more careful of how and to whom they fund. An unrealistic expectation might not find many takers and might put your project into financial risk.

Evaluating different models for project financing is important. Today, we can avail equity from both local as well as foreign institutions, 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, it would not stay the same for long and would become easier sooner than later.

What are the fundamentals of design that need to be looked into?

Design is a very important part of the process and if there is haste and resultant lags in the design, it can become almost impossible to rectify, and if possible, very expensive at times. It is important for developers to look into the design of the shopping centre very closely. The sequence of events, which are often mistaken are, a) creating a concept (not architectural, but conceptual); b) creating a mix (trade mix, tenancy mix could be decided later, except for key anchors); c) appointment of appropriate architect, it could be important to evaluate various architects before selecting one, primarily because of their past experience. There are a number of architects who are working in India today, but the relevancy of their experience is important. d) Concept design, it is not important that every shopping centre has a huge glass façade or is 100% air-conditioned, or has to be enclosed. Based on the concept, intent and catchment, these could vary; e) schematic design; f) 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 always understand that once the design is faltered, it is very difficult / expensive to rectify the same, thus spending time on planning is not time wasted, rather time well invested.

How do I ensure this project has longitivity?

While we are busy planning the overall development and ensuring capital procurement, construction schedules, it is important to find the answer to another very important question, which is, how do we ensure project longitivity? Though we will be able to build in a good mix and plan the project well, what can we do to ensure that the project is successful in the long run? The answer is effective mall management. Mall management has many functions involved in it, not only does it include the housekeeping and the parking management. But, it also includes tenant coordination, marketing management, regular improvements & upliftment of the centre. Though we create a good centre and it has a good opening, only effective mall management can ensure the sustained customer flow into the project.

If these 10 questions are effectively answered and outputs implemented, we should definitely have a number of successful shopping centres sprouting up across the country.
About the author: Shubhranshu Pani is Managing Director, Retail, Jones Lang LaSalle Meghraj
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