With the Government of India permitting reopening of malls from June 8, 2020 after almost three months of closure owing to COVID-19, mall operators and retailers can now plan a calibrated opening in the days ahead. However, mall re-openings have to be approved by the respective State Governments depending on the severity of COVID-19.
A survey conducted by a leading financial institution with mall operators across India indicate that malls being a relationship-based business, all stakeholders would work together for a feasible solution to minimise losses.
While mall consumption may eventually normalise by Q4FY21 (January-March 2021), mall owners may have to incur rental income losses of 25-40% in FY21E depending on extent of rental waivers offered, if any, and possible shift to a pure revenue share model from minimum guarantee once malls reopen.
Few cities may see malls reopen:
As per Anarock Capital, there are 159 operational Grade A malls in India’s tier I cities with Metropolitan Region (35 malls), Bengaluru (29 malls), New Delhi (17 malls) and Pune/Hyderabad/Gurugram/Chennai (13 malls each) having the major share of malls.
As per directives from Indian State Governments, the cities of Bengaluru in the state of Karnataka and Noida/Greater Noida/Lucknow in the state of Uttar Pradesh may open on 8th June, 2020 with the cities of Mumbai, Pune, Chennai and Gurugram unlikely to see openings in June 2020.
Clarity will emerge over the coming weeks on the number of retailers likely to reopen, safety protocols, opening hours and extent of pickup in footfalls and store consumption. As per mall operators and retailers, detailed SOPs have already been created and would be aligned with the SOPs given by the Government of India prior to the reopening of malls.
Here are few looming challenges for the mall stakeholders in the time to come…
Organised retailers/tenants: Typically, a superior mall has a mix of tenants across sectors such as department stores, apparel, white goods, jewellery, fine dining and QSR food outlets, gaming zones and multiplexes. Pre-COVID, rental costs for retailers (including facility management and common area maintenance) accounted for 15-25% of store consumption/revenue.
With malls in India now closed for over two months since mid-March 2020, retailers have had to forego revenues for this period and may have to potentially bear the store rental costs as well. When malls eventually reopen across India
(earliest possible date is 8 th June, 2020), certain categories such as apparel and department stores along with food QSR operators may be able to kickstart sales. Multiplex operators may have to wait longer to commence operations and also generate footfalls depending on upcoming movie releases/content.
Mall owners/operators: Malls are an annuity business with a few seasonal variations (sale season/festive season) which is captured through revenue share when store consumption crosses a fixed threshold. During leaner periods, a minimum guarantee ensures downside protection for the mall operator. With the
COVID-19 issue likely to linger till at least Q1FY21 (April-June 2020), mall operators stand to lose 20-25% of their annual revenue assuming that a rent-free period is given to retailers.
However, based on our industry interactions, while few mall operators such as Prestige Estates and Lodha Group have decided to give a full waiver for the period of lockdown (Brigade has given a 50% waiver for lockdown period), other major mall operators such as Phoenix Mills, DLF, Nexus Malls and Virtuous Retail have not taken any decision in this regard and will consider terms of rent payment after malls become operational again.
.While many retailers/tenants have cited Force Majeure clauses which would exempt them from paying rentals during the lockdown period, our interactions with legal experts indicate that the Force Majeure clause may not apply in this case as there is no permanent damage to the store or goods in the store nor is there any permanent restriction of physical access to the store. Further, as most operational malls run on Lease Rental Discounting (LRD) loans from banks which are self-liquidating in nature, non-receipt of rent payments would lead to default on principal and interest payments on the LRD loans. LRDs typically carry a repayment tenure of 8-12 years and currently most mall operators have opted for the temporary moratorium period of 3 months on payment of principal and/or interest on these LRD loans.
Consumers: While malls are temporarily closed, discretionary consumption has also been limited with e-tailers having commenced delivery of non-essential items only in May 2020. Even when malls reopen, social distancing and safety norms, negative sentiment and economic uncertainty will influence consumption patterns which may take 2-3 quarters to normalise.