Sunday, November 22, 2009

Retail rentals: Revenue sharing new buzzword



There is a new vocabulary evolving with retailers and their landlords in Pune. With a “market correction” on the rental front, the talk now is of MG (i.e minimum guarantees) and rev share (i.e. revenue share).

For landlords, rev share, a pre-determined precentage share of sales at the store, is emerging as a better option than vacant space. The trend has caught on at most of Pune’s premier high street areas, except the traditional market of Laxmi Road due to high demand and low availability.

“The highest correction in rentals has been on the Jangli Maharaj and MG Road high street shopping areas, where the correction has been up to 30%,” said Anand Dutta, who heads the retail practice in Pune for property consultants Jones Lang LaSalle Meghraj (JLLM).

Retail rentals in the city, based on carpet area, are now in the range of Rs 20-40 per sq ft. However, the prime high street locations offer rates at the upper end of the range.

Mr Dutta said more retailers are now looking at hiring space after the correction, but using the MG and rev share model. “The number of transactions is up as landlords become more practical, having discounted rentals by 30-40% with an 8-12% of revenue share,” Mr Dutta said.

One example of a retailer modifying his strategy is the 3 lakh sq ft Ishanya Mall in Yeravada area, near the airport. The retailer is believed to be re-working the rental strategy in line with market demand. Market sources said the mall, developed as retail business of Deepak Fertiliser and Petrochemicals Corp (DFPCL), is working out such a model with its two or three largest anchor tenants, having already re-worked its rentals.

“Arrangements like rev share are usually entered into with large retail chains which have books of account which they are willing to share so that the landlord is not done out of revenues,” market players explained. Office spaces are usually rented by MNCs and this segment is now back in the market.

However, JLLM managing director (west India) Pawan Swamy says: “Over the last six-eight months, MNCs have shown large requirements for office space. This is more for rent rationalisation or consolidation of operations. This is not new space hiring so don’t read a revival in this because office space is not reviving. It is still flat.”

The consolidation opportunity is bigger in Pune than rent rationalisation as MNCs are using the current opportunity to consolidate all operations in one place. Also, they might be relocating to a lower rental location, using the current price correction. Across the country, office rentals have fallen by 25-40% from the high of mid-2007.

Bucking the more cautious trend of the MNCs, Indian companies are expanding and in their traditional manner, preferring to buy rather than lease office space. Industry sources added that some real estate developers are changing the end use of some of their projects, in anticipation of an expected over-supply of retail space in the city in the next three years.

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