Planning to invest in commercial real estate? Read this report before you take the plunge

A new report highlights a growing concern for investors in Indian commercial real estate: the rise of "ghost shopping centers." Millions of square feet of retail space sit empty across India's top cities, indicating a widening performance gap between thriving malls and those struggling to stay relevant.

Knight Frank's report reveals that approximately 15.5 million square feet of retail space in India's 32 largest cities is now classified as ghost shopping centers. This figure is part of a larger total of 134.1 million square feet of retail space within shopping centers.

The report emphasizes the need for careful analysis before investing in commercial properties. Even locations that seem prime can become unprofitable. That said, the reality is a bit more complicated. these dormant spaces also present a significant opportunity. Revitalizing these centers could lead to increased rental revenue and new employment opportunities.

**Why Shopping Centers Fail**

The report identifies several reasons for the failure of shopping centers, including:

• Poor planning and oversupply:** Some centers were built in areas without enough customers or in markets already saturated with retail options. Gurugram’s MG Road, once home to five large shopping centers, illustrates this. Only the best-managed and best-located mall survived.
• Aging infrastructure:** First-generation shopping centers from the early 2000s often failed to keep up with changing consumer tastes. Shoppers gravitated toward newer, more modern options. The early shopping centers on MG Road in Gurugram lost their appeal as newer destinations like CyberHub emerged.
• Design flaws:** Poor layouts, insufficient lighting, and inadequate signage can discourage shoppers.
• Strata ownership issues:** Fragmented ownership can hinder quality control and tenant mix, resulting in a disorganized collection of shops rather than a cohesive shopping destination.
• Anchor tenant loss:** The departure of a major tenant can trigger a domino effect, leading to the exit of smaller stores and potential closure.
• E-commerce impact:** The rise of online shopping has negatively impacted mid-tier centers that failed to offer unique experiences.
• External shocks:** Events like the COVID-19 pandemic further weakened already struggling shopping centers.
• Regulatory and legal troubles:** Legal disputes and compliance failures can scare away retailers and visitors.

**Ghost Shopping Centers: A Closer Look**

Ghost shopping centers are defined as spaces with no retail or activity; they are simply empty. Of the 15.5 million square feet of ghost shopping centers, 11.9 million are in Tier 1 cities, demonstrating that even mature markets aren't immune. Tier 2 cities account for 3.6 million square feet.

Many first-generation shopping centers from the early 2000s now sit empty, unable to compete with newer properties. Tier-2 cities face additional challenges, such as fewer brand options and operational issues. That said, the reality is a bit more complicated. these cities also offer strong consumer demand, creating opportunities for repositioning.

Quality has become a key factor in retail success. Grade A shopping centers consistently outperform, while lower-grade assets struggle.

**The Opportunity**

The report suggests that reviving these ghost retail spaces presents a significant opportunity. An estimated 4.8 million square feet of dormant shopping center space in India has the potential for successful redevelopment.

If these spaces were redeveloped and reoccupied, they could generate approximately Rs 357 crore in annual rental revenue. This would not only boost retail turnover but also create jobs and enhance real estate value.

Tier 1 metros account for roughly two-thirds of this potential (Rs 236 crore), while Tier 2 cities contribute a significant one-third (Rs 121 crore).

For investors, acquiring or partnering with a distressed shopping center can be more cost-effective than developing a new property. Revitalized centers can generate healthy cash flow. Knight Frank analyzed 15 shortlisted shopping centers and found that, once reinvigorated, they have the potential to generate a rental yield of 5.86%.