Indian Retailer

While retailers are still working with the option of cutting costs and negotiating rentals to gear up for expansion, mall owners, who are vital for the organised retail sector, are experimenting with a new method - rent on a daily basis.

Atul Ruia-owned Phoenix Mills Market City mall has already implemented the system at a few of its locations, while others such as Inorbit and Nirmal Lifestyle, are actively considering it as an innovative option for their forthcoming malls.

Currently, the fixed rental or revenue share scheme is widely practiced with minimum gurantee money, depending on the brand, product and location of the space. Fixed rental was much preferred till the liquidity crisis spread and the global demand slump hit both retailers and mall owners.

“We are receiving quite positive response and have planned to implement it (the daily rental model) across the country,” says Phoenix Market City managing director Atul Ruia. “It is a viable option in an industry that is just recovering from a period of uncertainity.” India’s organised retail market, roughly estimated at Rs 20,000 crore, and which is closely connected with malls, was among the first sectors in India to be affected by the crisis as consumers postponed purchases. As a result, many retailers and mall owners started looking at various options including revenue sharing and a minimum guarantee amount.

Under the new process, the retailer will have a joint account with the mall owner and at the end of each day, the share of mall owner is debited to his account.

In the previous method - the revenue sharing model - percentage rents were payable annually, quarterly, monthly, or upon achieving breakpoint sales.

“We believe any innovative method that could streamline the system and synergy between the owner and the retailer is welcome,” says Inorbit CEO Kishore Bhatija. “We are looking at implementing first at our Hyderabad mall.”

Like Phoenix, Inorbit too has been in favour of the new model for its malls at Hyderabad, Pune and Bangalore. Inorbit’s mall at Hyderabad, which opened in October this year, has seen 66% occupancy on the revenue sharing model, while the remaining would be on daily basis, Mr Bhatija added.

Phoenix was first off the blocks, implementing it at its new malls in cities such as Mumbai, Pune, Bangalore and Chennai. Phoenix has three malls operational and plans to open seven in next three years, where this method will be applicable. It is now implementing in Tier-I cities and latter will be in other cities too. Phoenix also plans to open malls in smaller cities like Lucknow, Agra and Indore.

Nirmal Lifestyle, which is all set to launch its second phase of expansion next year, has planned for 30% remaining space at its new mall at Mulund, a Mumbai suburb. Chairman Dharmesh Jain says this model will evolve as a realistic method of revenue collection. “It would be beneficial with much transparent transaction between the two,” Mr Jain added.

However, the industry sees this practice at a very nascent stage. Jones Lang Lasalle Meghraj managing director (retail) Shubhranshu Pani says, “Though this method would derisk the retailer from the pain of high rentals, it will take another two three years to be widely used. “Retailers are pressing for better options before signing revenue sharing agreements rather than going for pure rental arrangements with mall owners,” Mr Pani added.

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.