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IN a capitulation that speaks to the depth of the slump in India’s economy, usually tight-fisted retail landlords have become uncharacteristically flexible on rents, as Lacoste India CEO Rajesh Jain knows well.
The French brand name has been offered space at a mall in the north Indian city of Jalandhar. But rather than seeking a fixed rent, the landlord is willing to take a cut of Lacoste’s revenue, a concession to the tenant to help it protect its sales margins.
“Discounts for a foreign lifestyle brand in a premium property were unheard of even a few months back, but now developers are coming to the table and are offering revenue share instead of rentals,” Rajesh said, adding that the landlord had also offered to furnish the store to secure Lacoste’s tenancy.
Retailers in India say they can now negotiate revenue sharing deals or discounts on rent of up to 20% and many are jumping at the chance, not necessarily because they see a bottom to the economic downturn but because the supply of new retail space is expected to tighten sharply from 2015.
“The discounts won’t be higher than 20% even if the economy doesn’t improve in the next two quarters because the lack of supply is going to hit market sentiment very soon,” said Saloni Nangia, president for retail at Technopak Consultants.
“There are not enough new malls being built,” she said.
Landlords cut rents during the global financial crisis but traditionally have not been sensitive to changes in the economy, largely because they were cushioned by wide margins.
Now, they have been hit by a combination of factors. They have a lot of idle space, some of it expensive, after betting heavily on efforts by the government to open up the retail sector to foreign competitors.
But the expected wave of foreign retailers failed to materialise, forcing landlords to offer discounts even in the premium malls and popular high-street locations long impervious to a weakening economy.
That has coincided with the broader slide in the economy and the fall this year in the rupee to a record low. GDP growth is running below 5%, less than half the rate seen in early 2010, and the pace of retail sales this financial year is expected to be its weakest in three years.
“Some corrections have happened. Some realities had to be considered,” said Tushar Mehta, the director of Amanora Town Centre, a 1.1 million sq ft mall (102,000 sq m) in the city of Pune, near Mumbai. “Retailers are seeing this as a window to close a deal at a better rate.”
The mall, with brands such as Hong Kong fashion chain Esprit Holdings Ltd, US clothing brand Levi’s and Britain’s department store Marks & Spencer, has renegotiated some leases in recent months at a discount of 5% to 8%.
Malls versus High Street
The chance to lock in cheaper rents has prompted Future Retail to focus on relocating stores rather than opening new ones.
It has opened only two of its flagship Big Bazaar hypermarkets this year through July, compared with 20 a year earlier. It has, however, relocated several to locations offering more competitive rents.
“There are many good deals available now and it only makes sense to block those spaces up because the economy won’t stay this way forever,” said CP Toshniwal, the group’s chief financial officer.
Costa Coffee, a unit of Britain’s Whitbread plc, is finding better deals on high streets than in malls, with prices down 10% to 15% in the past two to three months, its India managing director, Santhosh Unni, said. He expects rents to keep falling in the next six to eight months.
Hypermarket chain Spencer’s Retail, owned by power utility CESC Ltd, said rental costs have dropped as much as 20% and it has been negotiating for 40 properties ahead of plans to open 80 stores over four years.
“We are hopeful of booking twice the number of deals today than we would normally because the market has become more realistic,” said CEO Mohit Kampani. — Reuters
This article first appeared in The Edge Financial Daily, on September 20, 2013.
