Of every 10 new malls, six to seven opt for this model, according to C&W
With slowdown seemingly slipping away from sight, an increasing number of mall developers and retailers are now opting for rental revenue sharing model. As vacancy levels and rentals continue to dip especially in the metros, developers are banking on this 'performance based sharing' scheme to make up for the damages.
According to industry experts, the model comprises retailers sharing a percentage of their sales with real estate developers as a way of sharing risks. The move to adopt such a model is seen to be triggered by low footfalls that has been the bane of retailers since some time as well as lower rentals which has been troubling real estate developers during the slowdown.
As far as the revenue sharing ratio is concerned, industry players say, factors like format, market scenario, clients and type of properties, among other things come into play. "We have been opting for revenue sharing model with retailers in some of our properties. However, the ratio is dependent on several factors including rentals, kind of market, economic scenario, type of client, and type of properties, among other things. For us, the rentals for retailers vary from anywhere between Rs 10 per sq ft per day and Rs 800 per sq ft per day," said YK Tyagi, executive director at DLF.
Seconding Tyagi's views is Jaideep Wahi, director, agency, retail services, Cushman & Wakefield (C&W), a real estate consulting firm, who says, "In the last six months the trend of rental revenue sharing model has picked up immensely. Out of every 10 new malls, we can see this trend in about six to seven. The extent of revenue sharing for the developer, which varies from category to category, ranges from 3 to 18 per cent. While it is lower in case of electronic stores, for categories like sportswear and lifestyle stores, the sharing is more due to higher footfall."
In case of cineplexes, the developers seek fixed rental besides a portion of the revenue, he added. Some of the malls that have gone for rental-revenue share model include Express Avenue in Chennai, G-7 in Mumbai and DLF Promenade in Noida.
Many key locations across the country have seen mall rental drop of 15 to 35 per cent in the last one year. After witnessing a rental decline in excess of 40% over the last one year, Ahmedabad is seeing stabilization in main street rental values.
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According to latest quarterly report by C&W, average mall vacancy level across major Indian cities showed a marginal increase from 17.3% in the second quarter to 17.5 in the third (July – Sept) 2009. Retail rents in major markets also showed a move towards stabalisation in major locations in Mumbai, Hyderabad, Chennai, Bangalore and Pune indicating no rental changes over the previous quarter. NCR however, continued to witness correction in retail rentals.
Vacancy levels dropped in, Mumbai, Bangalore, Hyderabad and Pune in the third quarter though NCR, Kolkata and Chennai witnessed an increase in average vacancy levels.
This can also be attributed to the increase in supply in some of these markets. The total supply recorded in the third quarter was 1.9 million sq ft – an increase of 16% over the previous quarter.
The revenue share model has so far proved fruitful for retailers as well. Arvind Brands, for instance, has played with the revenue sharing model for its different formats including Megastore. "We have been playing two different types of revenue sharing model. One is where we are not required to pay any rentals to the real estate developers, and therefore, the revenue sharing ratio is higher. Second is where we pay certain amount of rentals as well as share part of our revenue," says J Suresh, chief executive officer of Arvind Brands Limited.
For large formats like Megastore, the retail company has opted for the former type of model, while for smaller formats it chooses to pay rentals apart from sharing revenue.
"Much of that depends on format, place as well as market scenario. Even the ratio is different for different formats. While we offer a ratio of 6-8 per cent for value formats, for lifestyle and premium formats it goes up to 15-20 per cent," adds Suresh, whose company pegged a turnover of Rs 440 crore for the financial year 2008-09.