Realty bites mall builders

As more malls dot the horizon, real estate developers lose bargaining power to retailers

With nearly 282 malls slated to come up by 2006, real estate developers are likely to lose their bargaining power on rentals as they are seen stabilising at Rs 150-200 per sq ft in the next one year.

Developers say that with greater supply of retail space, the retailers are likely to have thin margins forcing the developers to enter a revenue model where retailers pay a certain percentage of sales as rent.

"The supply of retail space is more than the demand so the prices will stabilise. Particularly in satellite regions like Gurgaon where some retailers at present pay just Rs 50-100 per sq ft. Many developers are now going into the revenue model as retailers are not going for lease," Pradeep Jain, chairman of Parsvanath Developers said.

Retailers like McDonalds, Shoppers Stop, Pantaloon, Dominos, Nirula are all into the revenue model in the malls maintained by Parsvanath, Ansals and Sahara.

"Though the developers prefer the rental model, the retailers are playing safe by agreeing on 10-12 per cent of over the counter sale. This is more predominant in malls where the footfall is less, like in Gurgaon where the rentals are lower," D Sachdev, vice-president, Ansal Properties, said.

Real estate consultants like Cushman and Wakefield say that there is a strong swing towards developing malls as retail enterprises from developing real estate as malls.

"With so many malls in the pipeline, developers will start having a stake in the retail enterprises to sustain and continue profiting from such ventures," Sanjay Dutt, director commercial agency, Cushman and Wakefield said.

However, this model calls for a strict monitoring of shop sales and developers like DLF still prefer leasing out the space. To fight the stagnancy in rentals developers like DLF are focusing on upmarket malls.

"Nearly 40 million sq ft of retail space will be added in next two years and DLF would be adding nearly 10 million sq ft in whole India. Even as the rentals are on an upswing, we see them stabilising at around Rs 180 in next few months," Ajay Khanna, executive director of DLF, said.

"We are not looking at the sales revenue model but would concentrate more on developing upmarket malls like the 'Emporium' in Vasant Kunj where brands like Louie Vuitton, Bvlgari and Swarovski would take up space at Rs 400 per sq ft. Even in our other malls like 'Prominade' in Vasant Kunj and a mall in Saket, we would focus on high end facilities to attract a rent of about Rs 250 per sq ft," Khanna said.

Others like Sahara are looking at setting up more multiplexes to make greater profit than leasing space to too many retailers.

Meanwhile, retailers like McDonalds and Shoppers Stop, which have occupied nearly 2 lakh sq ft in northern India, say that the rentals are in favour of the retailers with a mix of revenue-sharing model and rent available to them.

"We have booked nearly 30,000 sq ft of space in the upcoming malls and have done detailed analysis of the areas. We are looking at a cluster mode of expansion and with stable rental structure we see an advantage in booking spaces in the upcoming malls," Vikram Bakshi, JV Partner & Managing, Director, McDonald's India, North, said.