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Photo: Mint
Photo: Mint

Retail brands eye prime space amid capacity crunch at premium malls

As demand for space at top malls soars, owners amend lease pact to performance-based model, cut contract term

Mumbai: When US-based apparel and accessories retailer Gap Inc. launched its first India store in May, it chose Select Citywalk mall in New Delhi for its debut.

The same mall has also been chosen by Swedish fashion retailer Hennes and Mauritz (H&M) and US-based Aéropostale, a speciality retailer of casual apparel and accessories for teens, for the launch of its India operations next month.

Apart from these international apparel brands which are planning to launch their first stores in India this year, the existing ones such as Zara and Forever 21 are looking to expand their presence in the country.

Forever 21, for instance, plans to open four-five stores every year. It currently has around six outlets in India.

Most brands are chasing the same 8-10 properties located across the prime locations of the National Capital Region (NCR), Mumbai and Bengaluru, which hardly have any vacancy.

Ashutosh Limaye, research head at property consultant Jones Lang LaSalle (JLL), said the average vacancy level in prime shopping centres and malls is just about 6% in the top three cities—Mumbai, NCR and Bengaluru.

With demand for space in these malls soaring, mall owners are using their increased bargaining power to reduce contract periods and amending lease agreements to a performance-based model.

Under performance-based contracts, mall owners can exercise the right to relocate or evict a brand if the latter fails to generate a certain amount of business in a given period of time. Also, the contract tenure is being reduced to anywhere between two and five years for lesser- known retailers as against a period of 9-10 years in the past.

For instance, India’s most valuable realty firm DLF Ltd, which runs DLF Promenade, DLF Place and DLF Emporio malls in NCR, is now signing six-year contracts with retailers as against nine-year leases in the past.

“Developers will now have the upper hand and can command more aggressive deals, where their downside is better protected, both in the short and long term," said Pankaj Renjhen, managing director (retail services) at JLL India.

At Select Citywalk mall, brands such as Pantaloons and Shoppers Stop moved to higher floors or resized their stores to make way for global entrants.

Likewise, at DLF Promenade in New Delhi, brands such as Adidas, Reebok, ColorPlus and Da Milano are being relocated to higher floors from the ground floor to make way for new brands.

“There is a churn happening," said Dinaz Madhukhar, vice-president and mall head at DLF Promenade and DLF Emporio.

Madhukar explains that when DLF Promenade launched in 2009, the mall developer signed long-term leases of nine years. Now, as it looks to bring freshness to the mall, it is relocating some existing brands to higher floors and making space for new ones.

DLF Promenade will see at least 40% of the ground floor going to new brands this autumn and winter, said Madhukar.

Rental values at premium malls are also increasing and the gap with standard malls is widening. There has been no new quality mall development in the last four years in these three cities, said experts.

Some of the premium malls which are in high demand include Select Citywalk and DLF Promenade in New Delhi; Oberoi, Infinity and High Street Phoenix in Mumbai; and Forum and Phoenix in Bengaluru.

According to a half-yearly report by property consultant CBRE, the average rentals have gone up by around 9% in the past year, across premium mall clusters in the three cities.

For instance, the average rentals in central Mumbai, where High Street Phoenix mall is located, currently stands at around 550-650 per sq. ft, a 9.1% increase in the first half of this year, compared with the year-ago period.

Mall clusters such as Saket District Centre in New Delhi have also seen a growth of around 9% during the same period. The average rental value per sq. ft ranges between 550 and 600.

Mall clusters in eastern Bengaluru (airport road, Whitefield and Ulsoor) saw rental values rise by 11.8% in the first six months, compared with the corresponding period of last year.

“There is a supply-side constraint, with no new quality development coming up. In such a scenario, with everyone expanding, successful malls have hiked their rentals considerably," said Dipak Agarwal, chief executive officer of DLF Brands Ltd, a unit of DLF Ltd.

DLF Brands has a portfolio of brands, which includes Forever 21, Mango, Sunglass Hut and Mothercare.

The retailer plans to open four-five Forever 21 stores every year and 20-25 stores of brands such as Mothercare and Sunglass Hut.

Agarwal added that retailers now have to engage in extensive negotiations with mall developers to secure good terms.

Some brands such as H&M, however, are able to get favourable terms as they have the capability of driving footfalls for the entire mall.

“Rentals, by and large, are where they were two years ago if I were to index them," said Darshan Mehta, chief executive officer of Reliance Brands Ltd, a unit of Reliance Industries Ltd, whose portfolio of brands includes Steve Madden, Diesel, Gas, Juicy Couture and BCBG.

According to him, there are a few desperate brands which are willing to pay high rentals to get a favourable location, but most others are able to get deals structured favourably to suit them.

Justifying the high rentals, premium malls say they have the ability to drive sales.

“At Select Citywalk, we provide a platform for brands which are capable of generating revenue of 2,700 per sq. ft, which is probably the highest in India," said Arjun Sharma, director at Select Citywalk.

He acknowledges that at an absolute level, when compared with other malls, rentals at Select Citywalk could appear steep, but rentals only account for about 10-12% of a brand’s revenue from a store.

To be sure, a brand should also do its share of marketing, and engage with consumers on social media to pull in footfalls and create excitement, Sharma added.

India’s organized retail sector has inherent challenges such as poor infrastructure, multiple regulations and lower sales per sq. ft as compared with global counterparts. Sales per sq. ft in India is on an average five times lesser than the international average. Even gross margins as a percentage of sales are 7-8% lower than the international average, while rentals as a percentage of sales are twice the international average, said a February report by Gofrugal Technologies and Retailers’ Association of India, a lobby group.

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