It’s A Great Time To Be A Premium Mall Owner In India

Developers have been lowering lease tenures and increasing rents at a faster pace, causing a brand churn, BloombergQuint’s conversations with developers and retailers revealed. According to a June report by Anarock, the retail industry has moved from long-term tenures to shorter contracts of three to five years to constantly update the brand mix. That compares with an average tenure of more than five years in other countries, it said.

The availability of Grade A, or premium, malls in the country is limited and brands only want to be present there, Abhishek Sharma, director retail at Knight Frank, told BloombergQuint. As a result, rentals have been on the rise, he said.

Malls with an occupancy of 90 percent have seen a threefold jump in rentals and many premium brands are now renewing their leases at almost twice their earlier rent, JLL India said in a report. “One such BTL brand recently signed the new lease to retain its ground floor space in a Mumbai marquee mall paying twice than the earlier figure, a reported Rs 700 per sq. ft,” it said. “Similarly, other brands are also paying as high as 40-50 percent more to stay in premium developments. (Rents include charges for maintenance of the common areas).”

That comes when India’s real estate market is struggling to shake off a string of setbacks, starting with demonetisation to a stricter housing law and a now liquidity crunch that has spiraled a year after defaults by IL&FS group. But commercial real estate has been an outlier. Both office and retail properties generate demand and rental yields are growing, drawing investors.

Institutions, including private equity players, have ploughed almost $1.9 billion into Indian retail properties between 2015 and June 2019, according to Anarock. Developers are looking to add over 65 million square feet of supply by 2022-end—with top seven cities accounting for 72 percent of it—to more than double the mall space. That suggests premium supply is not enough to meet demand.

Uniqlo with its store in Ambience Mall at Vasant Kunj in the national capital joins the league comprising H&M, Shopper’s Stop, Lifestyle, Big Bazaar and other such big retailers—called anchor brands in industry parlance—that lease large mall spaces in prime locations. H&M has added more than 40 stores since its 2015 launch, each spread on 30,000 square feet. Shopper’s Stop, Lifestyle and Big Bazaar lease 30,000-40,000 sq. ft.

Add to that a string of Indian and foreign brands such as Vero Moda, Jack & Jones, Promod, Charles and Keith that look for medium-sized stores; and individual retailers who sell everything from jeans to mobile stores. What that means is every nook and cranny is taken, improving occupancy.

The tenure signed between mall developers and retailers for anchor and mini-anchor stores has come down from nine years to five years, while normal stores sign tenures of five years or lower depending on the brand, according to mall developers BloombergQuint spoke to.

According to a property consultant, malls with more than 95 percent occupancy include DLF Promenade, Ambience Vasant Kunj, Ambience Gurgaon, DLF Mall of India and Select City Walk Street in the National Capital Region; Palladium, High Street Phoenix, Viviana Thane in the Mumbai region; Elante, Chandigarh; South City, Kolkata; Phoenix Market City, Bangalore; Phoenix Market City, Pune; Alpha One, Ahmedabad; and Express Avenue in Chennai. The agency didn’t want to be identified as it’s not authorised to share the data.

DLF Malls, however, confirmed that it reduced the tenure of leases while rentals rose. In the last year and a half, according to Pushpa Bector, executive director at developer, rentals have gone up by 15-20 percent.

“Our malls have a vacancy rate of around two to three percent,” Bector told BloombergQuint. “The tendency is to reduce the tenure of the lease to anywhere between three to five years, and for mini anchors we sign a lease for six to seven years.”

Mukesh Kumar, chief executive officer at Infiniti Malls, told BloombergQuint that his mall still has a nine-year lease for anchors and mini anchors, and signs five-year contracts with individual retailers. But rentals have increased more than usual. The standard escalation is 5 percent a year, according to Kumar. “Due to many brands now being available, the rentals have increased 20-25 percent over the last three years against the expected 15 percent.”

Shoppers Stop Ltd. declined to comment citing silent period, while H&M India and Phoenix Mills Ltd. have yet to respond to an emailed query.

Lifestyle International Pvt. Ltd. said the rise in rentals has been as planned.

Other retailers BloombergQuint spoke with confirmed that rentals were rising—they spoke on the condition of anonymity out of business concerns.

In some malls, rentals have gone up by 50 percent, according to one. Premium spaces have seen a bigger increase as lease tenures fall, said another. And the spikes come when newer brands launch in India. Uniqlo has yet to respond to queries on whether it’s paying a premium over the market rate for its first outlet.

Mall owners, however, won’t be complaining about this problem of plenty.