India’s Mall Owners Are Trying To Fend Off Hard-Bargaining Retailers

Lease rental discounting and securitisation of receipts are ways to borrow against expected payments. And as shopping complexes thrived in India even as online retail is killing malls elsewhere, large developers obtained loans against this future income.

“This system involves a whole chain,” said Avikshit Moral, partner, corporate commercial and real estate at law firm Juris Corp. “If developers give discount to their retail tenants, they’ll not be able to service their debt to an NBFC or a bank, triggering a default,” he said. “Even the NBFC has repayment obligations and they rely on the payment by mall owners. The whole chain will be disrupted.”

India ordered the word’s strictest curbs to contain the Covid-19 pandemic, freezing every kind of economic activity barring essentials. Malls remain shut since March end even as restrictions are eased gradually. Since rentals are one of the biggest costs for retailers, developers have offered relief during the period of complete washout.

An executive of a retail chain told BloombergQuint on the condition of anonymity that Phoenix Mills Ltd., among India’s largest owner of shopping complexes, deferred payments during the lockdown but expects retailers to pay later. Phoenix Mills declined to comment on emailed queries citing silent period ahead of earnings.

Owners of Forum Mall and Lulu Mall also agreed to waive rents during the period of complete lockdown, a retailer told BloombergQuint on the condition of anonymity as he is not authorised to disclose details. Negotiations with other malls are on, said another.

“We’re reaching out to our individual tenants on a case-to-case basis to find a solution which is fair to all of them,” Rahul Saraf, managing director of Forum Mall, which has complexes in Bhubaneshwar and Kolkata and is building another in Odisha, told BloombergQuint over the phone.

While Inorbit Mall declined to comment, DLF Ltd. and Oberoi Mall didn’t respond to emailed queries.

Airports, the other big retail landlords, have been more amendable to retailers demands.

A retailer with stores at the Delhi, Mumbai and Hyderabad airports said on the condition of anonymity that the operators have agreed to waive rentals for March and April and will collect payments only on a revenue-sharing basis for the two months.

The airport operators have yet to respond to BloombergQuint’s emailed queries.

Retailers Want Bigger Relief

Anticipating no recovery anytime soon, retailers want malls to also restructure leases to ease their burden. Most prefer a shift to revenue sharing.

“For an individual store, if the rental goes above 20-22% (of sales), it’s very difficult to survive, unless it’s a very high-sales store like at the airport,” Dilip Kapur, chief executive of the leather goods maker Hidesign, told BloombergQuint in an interaction. “(For brands) the agenda has been set—we all agree that somewhere along the way we cannot pay for when the place was completely closed down,” he said, adding that they could pay a reduced rental until footfalls get back to normal.

Retailers owning about 200 brands collectively wrote to mall developers in April asking them to arrive at “a mutually agreeable arrangement on rentals, not only for the period of shutdown but also till normalcy returns”. BloombergQuint has reviewed a copy of the letter.

For businesses in the retail industry—and the 6 million-odd jobs that it generates—to survive the pandemic and its aftermath, the brands proposed:

• All tenants of malls should move to a revenue-share model with no minimum guarantee from March 1, 2020, for nine months.
• The revenue share should be a flat percentage by category of stores, with 10-12% for vanilla brands; 7-8% for food brands and large-format stores; and a negotiated percentage for electronics retailers. This includes common area maintenance.
• Landlords to not raise invoices or cancel them if they have already been raised for April.

Mall owners so far have been firm on sticking to contracts.

Niranjan Hiranandani, president of real estate lobby Naredco, told BloombergQuint over the phone that several institutional investors like Brookfield, which have invested in commercial real estate, can also stand firm and hold on to the rentals.

Manoj Agarwal, chief executive officer of Thane’s Viviana Mall, owned by Singapore’s GIC and Ashwin Sheth Group, also said the management has decided to be governed by the terms of the individual agreements.

“We have received communications from various categories of retailers on this subject,” Agarwal told BloombergQuint over the phone. “These are being evaluated in the light of the agreed terms with individual retail partners as well as their performance over the years.”

Developers Not Willing To Budge

Developers are adamant as their rental income is already expected to fall after some of them granted waiver during the first two months of the lockdown. According to estimates by property consultant Anarock, mall owners may see a 10-15% decline on collections in 2020.

If malls reduce rentals further, collections would decline even more and increase stress. That could potentially impact borrowings through lease rental discounting. A veteran banker explained how it works.

In lease rental discounting, borrowings are repaid through rent collection, the banker said on the condition of anonymity out of business concerns.

Usually, loans are advanced against a percentage of rentals, often with a buffer of up to 10 percent, he said. If the rental collections fall more than the buffer, most agreements would have a clause for the mall owner to pick up the deficit and pay the lender, he said. Or the bank would takeover any other collateral provided in the agreement.

Anuj Kejriwal, managing director and chief executive officer of Anarock Retail, also said in an emailed response that a decline in month-on-month rental collections not only affects mall operations but also disrupt developers’ bank payments and future rental generation capability.

‘Fait Accompli’

Still, Kejriwal fears that many retailers won’t be able to pay, causing defaults and litigation. And he expects the revenue-share model to gain prominence.

Gagan Banga, vice-chairman and managing director at Indiabulls Housing Finance Ltd., agrees. While lease rental discounting is more prevalent for office complexes than malls, Banga said the problem is that rent accounts for a much bigger share of operating expenditure for retailers.

For a company, especially outside the IT sector, lease contributes for 5-10% of operating costs, while for a retailer it could go as high as 50%, Banga said. “If the guy does not have a reduction in line with the new business reality, the guy will stay out of business.”

“It is fait accompli that malls will have to renegotiate on rent. There will be a tug-of-war, and eventually some reduction will happen,” he said. “My sense is that rentals will be negotiated 20% down.”

(Corrects an earlier version that wrongly interpreted Banga’s quote on the prevalence of lease rental discounting.)