Negotiating, renegotiating rentals

Not long back, organised retailers were spending a large chunk of revenues on rentals, which were skyrocketing, depending on the location and size of the outlet. Retailers had no other option but to pay heavy rents and enter flat agreements with mall developers and property owners.  However, the economic slowdown brings good tidings for retailers in terms of rentals.

 

Property prices correction

Property prices have undergone correction in almost every part of the country, i.e., around 15 to 20 per cent in metros and tier I cities, while 25 to 35 per cent in tier II and tier III cities, thus giving a much needed breather to retailers from costly rentals, which once used to eat the maximum pie from the revenue generated from the store itself. Mr Samar Singh Sheikhawat, Vice President, Marketing, Spencer's Retail Ltd says, “In tier I and metros, the correction is said to be in the range of 15–20 per cent.  Maybe, it will take another couple of months, before this starts showing some impact.”

 

Negotiating & renegotiating rentals

Due to the slump in the real estate segment, organised retailers have started negotiating/renegotiating rentals with mall developers and property owners. Mr Vijay Bansal, Managing Director, Cantabil states, “In malls, we have negotiated 30 to 50 per cent, and in metros and other top cities we have negotiated 15 to 20 per cent.” But convincing developers and owners to lower the rentals or follow a revenue sharing model instead of flat agreement is a grueling task. Mr Ambeek Khemka, Group President, Vishal Retail Ltd opines, “We had to convince them to do so and have seen a 20 to 30 per cent drop.” Retailers whose agreements are yet to be renewed are hoping to cash in on the current downward trend of property prices. “In terms of the rentals, whenever the agreements will come up for renewal, we will look at the rentals and take decisions accordingly,” said Mr Sheikhawat.

Organised retailers are able to save a part of expenditure on rentals and are using it at some other level of retail operations, i.e., back end and front end operations. Mr Khemka adds, “We started negotiating for the rents long back and till date we have saved about Rs 3 crore.” Mr Bansal adds, “It will help us to maintain the margins and we are planning to cover more than 5 lakh sq.ft of area by the end of March 2010.”

 

Revenue sharing model

Mall developers are once again caught in a peculiar position due to the southward trend of property prices. Earlier, the supply out passed demand and due to high rentals, outlets in malls remained vacant. But to cope with this situation, mall developers need to provide world class facilities and services to attract retailers. Commenting on the same, Mr Goel says, “To prevent our malls from failure, malls built by Omaxe are strategically located with state of the art infrastructure, lighting and fire protection.” However, mall developers now have to attract retailers by offering lucrative rent deals such as the revenue sharing model. Mr Sheikhawat shares, “Many of the mall owners are now keen on revenue sharing as compared to a flat rental agreement which we have followed till now.”

 

Sum up

The slump in the real estate sector has provided the much needed respite to the retailers who are looking to expand. But it’s a temporary downfall and retailers will have to come up with some other cost cutting measures to make the business profitable.

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