Rentals for retailers have dropped by as much as 40 per cent in key cities across the country even as mall owners are devising alternative survival strategies to beat the slowdown.
Worse, rentals are expected to drop further in the next six months in key metropolises, experts say.
Spencer's Retail, the retail arm of RPG Group, says it has seen a 30-40 per cent decline in the rentals in Tier-II and -III cities.
In Tier-I and metropolitan cities, the correction is in the range of 15-20 per cent, and a further correction and its impact is likely to come in the next few months.
"Rentals are getting revised downwards by 20-30 per cent, mostly in metropolitan cities," said Atul Chand, divisional chief executive officer of Wills Lifestyle, the retailing arm of ITC. Wills Lifestyle has 50 outlets, of which 24 are located within malls.
MedPlus, which has 600 pharmacy stores in Hyderabad, Bangalore, Chennai and few other cities is negotiating for a reduction in rent, according to Madhukar Gangadi, founder and chief executive officer of MedPlus.
"Over the next six months, retail rentals may drop close to 30 per cent in metropolises and about 50 per cent in Tier-II cities," said Bappaditya Basu, vice-president and associate director - retail, Jones Lang Laselle Meghraj,
Indian retail landscape is undergoing a change as retailers grapple with slowing demand and falling revenue. Most retailers are negotiating with mall owners for a lower rent or shifting to a revenue-sharing model.
Revenue-sharing gives mall owners the flexibility to earn more as the retailer's turnover increases over time. On the other hand, fixed rentals could be a dampener in the long run because agreements to increase rentals range 10-15 per cent each year during the span of the contract.
"We have entered into a revenue-sharing arrangement with our retailers with a minimum guaranteed amount for each month. The revenue-sharing arrangement is for 10-12 per cent of the retailer's sales per month," said Kishore Bhatija, chief executive officer of Inorbit Mall, which belongs to the K Raheja Corp that also owns retail brands such as Shoppers Stop.
"The minimum amount guaranteed per month by the retailer is also negotiable and decided on a lower amount so that the retailer can live up to the commitment."
Moreover, lower rentals mean faster break-even for retailers. For instance, paying 25 per cent towards retail rental would take a retailer close to three years to break-even, while 15 per cent payment towards rental would mean retailers would now be in a position to break-even within two years.
Wherever mall owners or landlords have failed to negotiate, retailers have shut shop or moved to an other locations. Future Group has shut its 70,000 square feet Big Bazaar near Shyamal Cross Roads in Ahmedabad. Subhiksha has also downed shutters of a couple of its stores in Ahmedabad.
Elsewhere, mall owners are giving into the demand for lowering rent. "We have started negotiations with developers on lower rentals.
"The rent was over-valued by three to four times in some parts of Bangalore. For upcoming malls, indications are that the rent to revenue ratio would see a dip from 40-50 per cent to 25 per cent in the next few months," said J Suresh CEO of Arvind Brands, which is the retail division of Arvind Mills and has licensing relationships with international brands such as Arrow, Gant, Cherokee and a joint venture with VF.
Industry estimates are that there has been a 15-20 per cent downfall in footfalls in the last four to five months at most malls in Bangalore prompting developers to accept proposals of renegotiating rentals. "Consumer demand has slipped by 25 per cent," said Basu.
Through hard bargaining, retailers have been able to bring down the share of rentals as a percentage of revenue even as sales have declined.
For example Reebok, which has more than 720 stores in the country, had paid about 10 per cent of their total sales as rentals on their retail outlets three years earlier.
As rentals rose, the ratio spurted to 25 per cent of the total sales, but expects to fall in the next few months as it has embarked on fresh negotiations with landlords and may shift to revenue-sharing model.
About 15 per cent of the company's stores are inside shopping malls.
"In the next six months, we expect the share of rentals to fall to 15 per cent of our sales, thanks to the flexibility shown by mall-owners," said Vishnu Bhagat, chief financial officer of Reebok.
Revenue sharing has been in vogue in India since 2003, but not many developers and retailers were willing to accept it. But with the slowdown becoming more pronounced, more retailers and developers are now amenable to shifting to the revenue-sharing model.
Future Group's 40 per cent stores are inside shopping malls and almost all of which are anchor stores. In most cases, the arrangements with mall owners are for rentals, which in some instance are as low as Rs 45 per cent square feet, because the contracts were signed almost a decade earlier.
Inputs by Archana Prasanna/Maulik Pathak Krishna Mohan
