Retail Attractiveness Index 2011 Painting the retail landscape of India

� On Point • Retail Attractiveness Index �011

REIS Retail Attractiveness Index 2011

1Tier 1 refers to NCR-Delhi, Mumbai, Bangalore and Chennai. Tier II refers to Hyderabad, Pune and Kolkata. Rest of the cities are classified as tier III. �Socio-Economic Classes (SEC) are a method of dividing a population of interest into groups to categorise consumer behaviour usually based on income and occupation of the head of household, although other variables can also be used, which are based on the terminal education age and occupation of the main income earner. Source: The Market Research Society of India

Indian retail sector has witnessed unprecedented growth over the last decade driven by robust economic growth, rapid urbanization and changing lifestyles and aspirations of the Indian consumer. From less than a million sq feet of mall space in �001, Indian organized retail sector now boasts of close to 55 million sq feet of organized retail space.

Even though organized retail emerged roughly concurrently in the top cities of India, the retail landscape varies significantly across these markets, as cities differ greatly in size, maturity, purchasing power and socio-cultural factors. Moreover, with the passage of time, rising incomes and urbanization continue to morph the character of mature cities and emerging cities alike. While growth in tier I and tier II cities1 is maturing in certain segments and at locations, tier III cities are undergoing an unprecedented transformation as they embrace organized retail and develop brand consciousness.

However, despite the promising growth story of India, success in organized retail remains challenging and is by no means a given. The global financial crisis of 2008 brought to limelight the lack of research and planning on the part of developers wanting to cash in on the retail boom. Developers, on a mall construction spree, had failed to take into account the underlying demographics, socio-cultural preferences and mall management techniques that are so vital for success. However, several mall owners were quick to adapt to the rapidly changing business environment, by providing more participative and collaborative approaches to mall management, such as adopting revenue share models. However, there were instances of retail developments which were still under initial stages of implementation, getting shelved, stalled or converted to offices or residential projects.

So far, investors, developers and retailers have been expanding into tier III cities a bit too cautiously. Although it is true that there are no precedents (elsewhere in India or abroad) to follow, we believe it is much wiser to benchmark and assess the potential of Indian cities on several economic and social parameters rather than directly imitating or re-applying the concepts from tier I cities of India. Thus, it is imperative to give adequate thought to the defining characteristics of various Indian cities in order to develop a realistic perspective of opportunities and design tailor-made strategies for each city.

In this paper, we present a calibrated Retail Attractiveness Index for the top �0 retail destinations of India to shed further light on the market conditions and potential of these cities.

Methodology and Construction of the IndexThe benchmarking of the retail landscape of Indian cities has been done holistically using two complementary metrics namely

Consumption potential of the retail market influenced by demographics, income & expenditure levels, propensity to consume and psychographic predispositions. This is captured using the Market Potential Index (MPI).Maturity of organized retail real estate as represented by the presence of high grade mall developments. This is captured by the Retail Maturity Index (RMI).

The plotting of these two indices reveals how cities stack up against each other in terms of potential retail demand versus the supply of retail spaces. While most of the Indian cities are underserved, some have attained a relative degree of maturity, as developers and investors have already ventured into them, and several malls are either operational or are expected to become operational in the next couple of years.

The relatively underserved cities have a high potential for retail demand and yet don’t have enough supply to support, which indicates the opportunity for new mall developments. In such cities, developers and investors should carefully analyze the untapped clusters and also take into account the unique socio-cultural characteristics of the city before launching new ventures.Developers of under-construction malls in the relatively matured cities should focus on successful execution of the project by differentiating their offering through a strategic mix of tenants, experimenting with new formats and better mall management. Even in these cities, certain office and residential growth corridors remain underserved, which provides opportunities to developers and retailers to venture into construction of new malls, despite apparent saturation of the market at a city level.For the purpose of calculating the indices, datasets pertaining to the SEC A� population have been used, wherever available. Since Socio-Economic Classifications represent consumer behavior, rather than income alone, they are a better indicator of the consumption potential of a city, and as such this demographic segment represents the appropriate target consumer segment for organized retail.

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On Point • Retail Attractiveness Index �011 �

Factor Indicator Metric

Market Potential Index (MPI)

Population Population - Population of a city is the defining parameter for demand potential Total SEC A Population

Demographic

Young population drives consumption Number of adults in the 18 - 45 years age group Number of households where CWE’s� age is 25-34 years.

Migration - Migrant population not only adds to the consumer base but is also likely to have increased acceptance to organized retail spaces such as malls versus conventional stores

People4 who migrated to the city in the last 4 years

Educated consumers are more brand conscious and also have a higher preference for malls Number of graduates

Income, Earning Potential & Propensity to Consume

Households above a certain Income threshold are more likely to shop with higher frequency and foot larger bills than households with lesser income

Number of Households with income more than INR 500,000 (referred to as Target Income Group or TIG henceforth)

Expenditure of TIG is a proxy for Propensity to Consume Expenditure of households with income more than INR 500,000 per annum

Families which have more than one employed member have higher earnings potential. Moreover, employed members of the household have greater economic freedom who can make independent choices regarding consumption.

Number of households with more than � employed membersNumber of households where spouse of the Chief Wage Earner is employed

Social & Cultural

Psychographic Predisposition - Cultural preferences and traditions can lead to an overall higher or lower predisposition towards consumption among the inhabitants of the city

Social indices that rate cites on cosmopolitan culture, youthfulness, openness to experimentation, brand consciousness and acceptance of organized retail

Consumerism - Presence of household electronics and vehicles are good proxies for measuring consumerism

Penetration of cars and household gadgets such as TV, washing machine, refrigerator etc.

Exposure to Media - High media consumption exposes consumers to advertising and is hence likely to foster consumerism

Average daily time spent on TV, radio, Internet and newspaper

Employment Opportunities

The degree of office stock and supply have a spiraling effect on consumption by generating employment, attracting migrants and fostering a cosmopolitan culture

Grade A Office Stock as measured at the end 2Q11. Office supply is measured as total Grade A office space of projects expected to be completed by end of �01�.

Retail Maturity Index (RMI)

Retail Rents

Prime retail rents - Increased penetration of national and international brands along with availability of a high-income catchment ensures that profitability is maintained, even at higher rents in matured markets. However, this factor can become negative with high supply, as markets reach saturation, leading to correction in rents.

Average vanilla rents of on first floor of 50% of the malls in the prime areas of the city (excluding the top 25% and bottom 25%)

Completed Stock Presence of high quality completed stock shows the extent of maturity of the market

Total existing organized retail space. Higher weightage is given to Grade A developments than Grade B. Grade C developments are excluded.

Upcoming SupplyUpcoming supply is a leading indicator for the extent of maturity expected in the market in coming years. However some of these developments may never see completion

Total organized retail space that is expected to come up by the end of �01�. Higher weight-age is given to Grade A developments than Grade B. Grade C developments are excluded.

Vacant Stock Lower the vacancy the better it is, as upcoming malls can serve pent up demand while landlords retain bargaining power Total vacant stock of malls in the city as on 2Q11

�Chief Wage Earner 4Number of migrants is based on total population due to unavailability of data of migrants in SEC A population.

Source: 1. Analytics and real estate data is sourced from Real Estate Intelligence Service (Jones Lang LaSalle). �. Demographic, socio-cultural and income data is sourced from Indicus Analytics �009-�010.

Note: 1. The word population wherever used in this report refers to SEC A population and all per capita calculations are done on the basis of SEC A demographics. �. Factors shown in grey color above are context builders and have not been included in calculating the indices.

Figure 1: Constituent Indicators and Metrics Used in Creating the Indices

4 On Point • Retail Attractiveness Index �011

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On Point • Retail Attractiveness Index �011 5

Top 10 Cities on Market Potential Index Mumbai - Mumbai, home to the largest number of TIG families, has the highest retail demand potential. However, lack of availability of land parcels leading to high rents in prime areas acts as a dampener due to which Mumbai lags behind NCR-Delhi in terms of existing retail stock and upcoming supply. However, the city has established high street retailing, with Linking Road at Bandra, Colaba Causeway and Breach Candy. High migration rates and rising office supply will continue to further fuel the pent-up demand for organized retail. NCR Delhi - The city, having topped all socio-cultural indices and having embraced organized retail whole-heartedly, epitomizes consumerism as exemplified by the penetration of cars second only to Chandigarh. Rents in prime areas of Delhi are lower than those in the prime areas of Mumbai. Despite having the largest stock of organized retail spaces, NCR trails behind Pune, Hyderabad and Bangalore in terms of per capita supply of retail space and as such continues to have significant potential for retail penetration going forward at locations, which are still underserved. Also, due to the wide expanse of development in the region, which includes the suburbs - Gurgaon and Noida, large residential catchments are being constructed across a wider geography. Hence, there exists the potential to construct organized retail spaces without clustering.Bangalore - With the highest office stock per capita, Bangalore rates highly on all social indices as well as exposure to media. Despite these positives, the city ranks 15th on the metric of per capita expenditure of TIG families among the �0 cities dampening the retail market potential somewhat. The Outer Ring Road, with numerous commercial office developments, Bellary Road, Hosur Road and Whitefield provide opportunities for developing quality retail developments.Chennai - Chennai is at par with Pune in terms of the affordability of rents and office stock and supply. Moreover, the city churns out a large number of graduates each year. However, the preference towards working in Chennai from people belonging to other regions in the country is relatively low as indicated by the low number of immigrants. Chennai rates low on consumerism and social indices, which explains the reason for its lowest retail stock per capita among tier I & II cities. However, numerous upcoming office and residential developments concentrated along the Old Mahabalipuram Road provide distinguished opportunity for organized retail spaces.Pune - Pune provides the most affordable rents in prime areas among the tier I & II cities. The high migration rates will be well supported or

LimitationsPenetration of cars might be influenced by infrastructure of the city. Cities like Mumbai where people depend more on public infrastructure are less likely to have a high penetration of cars compared to cities where people are better off possessing private vehicles.Preference for malls will be higher in cities where shopping centres have been historically prevalent (e.g district centers in Delhi) versus cities where high street shopping has been prevalent (Mumbai, Chennai and Hyderabad).While the growth of office space has been considered to be the proxy for employment generation, some cities would also benefit from industrial growth.The cities for analysis have been selected on the basis of the number of TIG households in the SEC A population as well as retail maturity. Some cities beyond the top twenty might have a better market potential than those included.

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even enhanced in the future given that the city has the highest office supply per capita in the pipeline. Developers are rightfully eyeing the opportunities that this city provides as indicated by the highest per capita upcoming supply of mall space among the �0 cities.Kolkata - Kolkata, the land of literary elite, has the highest proportion of graduates and post graduates. However, not only does the city have the lowest percentage of young population, but its consumers also prefer high streets over organized retail. The city has the lowest level of penetration of cars and households gadgets, despite highest number of TIG families in tier II, which indicates relatively low level of consumerism.Hyderabad - Given the backdrop of low consumerism and a preference for high street retailing, the completed retail stock per capita is the lowest after Chennai. However, given superior migration rates and the highest percentage of young population among tier I and II cities, the city holds promise for future mall space developments.Ahmadabad - The 8th most populous city of India offers affordable rents to retailers. Moreover it has the 6th highest office stock per capita. It is surprising that despite a high rating on consumerism and presence of TIG families, the per capita upcoming supply of retail space is lower than Jaipur, Surat and Vadodra reflecting the high unmet potential for organized retail.Chandigarh - With the highest number of cars per person, Chandigarh rates highest on consumerism as reflected in its per capita expenditure of TIG which is second only to Vadodara. However, the city’s upcoming supply is worrisome since it already has the highest retail stock per capita. Nevertheless, new malls will benefit from the new office developments which will attract immigrants and retain the youth studying in Chandigarh universities.Amritsar - Similar to Chandigarh in terms of consumerism and per capita expenditure, Amritsar has negligible Grade A office stock and supply per capita. Despite this, it ranks 7th on retail stock per capita. Yet it ranks 14th on upcoming retail supply.

The Next 10 Cities Surat - Surat, home to the diamond merchants of India, ranks 11th on the number of TIG families. Every year, hordes of entrepreneurs and factory workers flock5 to the city to be a part of the wealth generating potential of the city. Consequently the city has the highest percentage of young population. Although, recent mall developments have enabled Surat to be ranked 6 th in terms of mall space per capita, the city has negligible retail supply per capita coming up in the next two years.

6 On Point • Retail Attractiveness Index �011

Vadodara - Vadodara, an industrial town similar to Surat in terms of ethnicity and profile of the consumers, has the highest expenditure per capita among the �0 cities. Unlike Surat, the per capita mall space is relatively low and hence the relatively higher upcoming retail stock per capita is quite desirable. Nagpur - Nagpur is the 9th most populous city of India and consequently has the 9th largest number of TIG households.

Although, the city ranks very low on consumerism and social indices, its young population (rank �) is likely to drive consumption in the coming future as their income levels rise, given its �nd highest supply of office space per capita.Ludhiana - Similar to other cities of Punjab, Ludhiana ranks highly on consumerism and social indices. Given this backdrop, the city is supplied with organized retail stock (rank 9) despite being 17th on per

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Figure 3: REIS Retail Attractiveness Index 2011 – Market Potential versus Retail Maturity

Source: Real Estate Intelligence Service (Jones Lang LaSalle).

Cities such as Ahmadabad, Jaipur, Ludhiana, Indore and Chandigarh have witnessed swift growth in retail development in recent years. Lack of entertainment options and inconvenient retail environments in these cities have assisted the success of the first malls and shopping centers.Chandigarh, Kolkata, Chennai and Delhi have the highest number of graduates per capita. Home to several universities, these cities also attract young migrants to the city, who come to study and work in these cities.Ahmadabad ranks the highest among tier III cities in terms of its market potential, yet lags behind in terms of market maturity. Chandigarh which is close to Ahmadabad in potential is relatively higher on maturity.Amritsar and Surat are the next highest in terms of market potential. While Surat has a decent supply of malls, Amritsar lags behind in supply.The northern regions of India rate high on propensity to consume followed by the western, eastern and southern regions.Cities in Punjab and Rajasthan have higher rents in prime retail areas compared to Gujarat and Madhya Pradesh. The right rents for retailers would be a function of retail sales, and those cities which are able to offer quality spaces at low rents, will attract interest.Industrial towns are similar to each other in consumer preferences and socio-economic & demographic profiles. Most of them remain equally under-served despite recent mall developments in the last couple of years.

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On Point • Retail Attractiveness Index �011 7

5Migration rate in case of industrial towns is upped by the large number of factory workers immigrating to the city in search of employment. A high proportion of them might not be in Sec A.

capita expenditure of TIG households. In the coming years, its superior migration rate (rank 5) is likely to keep retail spaces in demand.Coimbatore - Coimbatore has one of the highest SEC A population base after Ahmadabad and ranks 1�th on the number of TIG. However, poor demographics (low number of migrants and youth in the city) have kept retail consumption in check. Further, Coimbatore rates poorly on consumerism and social indices, and thus it’s no surprise that it has the lowest retail stock per capita among the �0 cities.Lucknow - Lucknow has the second highest proportion of graduates after Kolkata. Despite a superior ranking on social indices, the city ranks 16th on per capita expenditure of TIG. Given lackluster amount of office stock and supply, the city has little retail stock and supply per capita as well.Jaipur - Despite a relatively high SEC A population, it has the second lowest number of TIG. The city is expected to witness a decent amount of office supply per capita in the coming years, which is likely to further increase its already superior migration rate (rank 10th). Not withstanding the high percentage of young population (rank 4), the demand for retail space is only going to increase as income levels rise in the coming years.Indore - Indore has the lowest per capita expenditure of TIG among the 20 cities, even though it has 30% more number of TIG households

than Jaipur. Similar to Jaipur, Indore has superior ranking on young population (rank 6) and existing office stock and upcoming supply per capita. As income levels rise, retailers will benefit from improved sales in the city’s already operational high quality malls. Kanpur -.Kanpur, the 10th most populous city of India, has four times the Sec A population of Chandigarh and yet the number of TIG households is higher only by 25%. Even with a higher number of TIG, it trails behind Chandigarh in terms of total expenditure of TIG households. This is explained by its low rating on consumer preferences due to social and cultural factors. Despite being home to highly educated population, the city is witnessing low investment grade office supply per capita.Raipur - Raipur ranks last on most parameters among the �0 cities. However, the per capita expenditure of TIG is the 10th highest among the �0 cities. This coupled with a superior young population (rank 5) could drive demand for retail spaces if its consumers embrace the mall culture, especially since existing retail stock per capita is quite low. Developers and investors in tier II and III markets need to be more cognizant of the viability of their retail projects while planning, building and operating their properties to tap this demand. Clearly, the growth in retail footprint in India will be driven not just by metro cities but also tier III cities in the coming future.

Himadri Mayank Assistant Vice President, Research & REIShimadri.mayank@ap.jll.com+91 �� ��07 1500

Himadri Mayank manages the operations of Jones Lang LaSalle’s research offering - Real Estate Intelligence Service (REIS), and is responsible for the team’s outputs, including research reports such as topical whitepapers. Since joining the firm in 2008, he has delivered several bespoke research projects in the office, retail and residential sectors based on specific client requirements.Himadri holds a bachelor’s degree from Indian Institute of Technology (IIT), Kharagpur and has over four years of experience in the field of real estate. He is pursuing the Chartered Financial Analyst (CFA) program offered by CFA Institute, Charlottesville and has passed the 2011 Level III CFA exam. He is the life member of Association for Promotion of Creative Learning, a not-for-profit organisation which aims to promote education for underprivileged through creativity and creative learning in society.

AuthorsAnkit Bansal Senior Analyst, Research & REISankit.bansal@ap.jll.com+91 �� ��07 151�

Ankit Bansal has been involved in enhancing and expanding the Real Estate Intelligence Service (REIS) by designing new research and analytics offerings. Based out of Mumbai, he also manages bespoke research assignments and contributes towards client reports that aid investment and portfolio management decisions. Prior to joining Jones Lang LaSalle, he was involved in market research, business analy-sis and consulting across diverse sectors including consumer goods, digital media and financial services. Ankit holds an undergraduate degree in Business Studies from Delhi University and a Masters degree in Knowledge Management from Nanyang Technological Univer-sity, Singapore.

About Jones Lang LaSalleJones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated servicesdelivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With �010 globalrevenue of more than USD �.9 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately1.8 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’slargest and most diverse in real estate with USD 45.3 billion of assets under management.Jones Lang LaSalle has over 50 years of experience in Asia Pacific, with over 20,800 employees operating in 77 offices in 13 countries acrossthe region. The firm was named the Best Property Consultancy in Asia Pacific at ‘The Asia Pacific Property Awards 2011 in association withBloomberg Television’. For further information, please visit our website, www.ap.joneslanglasalle.com

About Jones Lang LaSalle IndiaJones Lang LaSalle is India’s premiere and largest professional services firm specializing in real estate. With an extensive geographic footprint across eleven cities (Ahmedabad, Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of over 4000, the firm provides investors, developers, local corporates and multinational companies with a comprehensive range of services including research, analytics, consultancy, transactions, project and development services, integrated facility management, property and asset management, sustainability, warehousing and logistics, capital markets, residential, hotels, health care, senior living, education and retail advisory. For further information, please visit www.joneslanglasalle.co.in

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