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Real estate is the largest component of cost for a modern retailer in India. At an average of 15 per cent of sales being paid out as rentals – compared to 2-3 per cent of sales in developed markets – just the retail space cost is enough to seriously dent a low-margin retailer’s bottom line. However, is reduction in rent the proverbial Final Solution?

No wonder then that the predominant demand of retailers from developers/mall owners in recent months has been some rationalisation in rental payouts. And this phenomenon is not limited to India, by any means. Anywhere in the world, the perennial complaint – especially of small retailers — is that rents are too high and this causes profit margins to be too low.

One possibility is just to build a lot more shopping centres. The resulting oversupply will put downward pressure on occupancy and rents. The downside to this theory, is however, that sales densities will suffer as well, and that obviously does not help matters.

Falling rent is clearly good news for a variety of reasons, including the fact that retailers – big and small – are able to access previously unattainable locations at affordable rates. On July 31, JCPenney opened its first Manhattan location at the Manhattan Mall. Later this year, Costco is scheduled to open its long-awaited store in East Harlem at 116th Street at East River Plaza. Joining Costco there is the inaugural location for Target. Meanwhile, Nordstrom has announced it signed a lease to open a 32,136 sq.ft Nordstrom Rack, the company’s discount retail format, which will open in spring 2010. In the Indian context, retailers point out that due to the flux in sales figures, it becomes a little annoying to follow the pure rental format.

The average vacancy across malls in major cities of India increased from 10 per cent in the first quarter of 2009 to 19 per cent in the second quarter due to a slowdown in the uptake of mall space and churn amongst the existing clients, according to the report. This increase in the vacancy was critical in bringing about further correction in the mall rentals. Naturally, a correction is followed by re-negotiations. Enter the ‘Minimum Guarantee Scheme’ (MGS) and revenue sharing. Properties such as Inorbit, Forum Value Mall and Select CityWalk in Delhi have reportedly shifted to a combination of minimum guarantee and revenue sharing models, accompanied by a performance clause in the agreement. Clearly, such flexible revenue models are acceptable to the retailers as the risk is shared between the real estate owner and the retailer. Also, it makes the developer more accountable for generating footfalls and conversion rates in the mall, while reducing the risk of high vacancy in the mall.

Now comes the rider – for such models to take effect, retailers will have to disclose sales figures. Is that completely possible? Devangshu Dutta, chief executive of Third Eyesight says, “If retailers want a variable rent rather than a fixed figure, and if they want mall developers to ‘share the risk and the reward’, they absolutely must share sales figures.” He further adds, “However, if confidentiality is a concern, then the only option remaining is to decide a rent that is viable for both. Problems include the high prices at which the land has been acquired, the lack of adequate demand mapping which has resulted in over-clustering of malls and overpricing at launch, and overall dampening of demand in the last couple of years. Both sides will have to look beyond the immediate transaction – of course, that is only possible if each company has the cash and the power to sustain through this temporary economic situation.”

“If retailers want a variable rent rather than a fixed figure, and if they want mall developers to ‘share the risk and the reward’, they absolutely must share sales figures.”
–Devangshu Dutta, chief executive, Third Eyesight

As a follow up on the subject, IndiaRetailing’s weekly poll question – If retailers don’t share their mall stores sales figures with developers, is a ‘minimum guarantee’ rent the only answer? – 66.67 per cent of the respondents supported the theory where as 19.05 per cent of them negated the same and 14.28 per cent of them preferred to stay neutral on the same theory.

Emphasising on the same poll question Anuj Puri, chairman & country head, Jones Lang LaSalle Meghraj, says, “A minimum revenue sharing/guarantee module implies that a partnership exists between the retailers and mall developers. Such a partnership cannot thrive on any platform other than trust.” He further adds, “If any retailer does not deign to divulge sales figures to the developer, such a partnership cannot exist; a flat rent would then be the only solution. This yardstick would be applicable for all retailers who do not disclose their sales figures, while the revenue sharing/minimum guarantee module would continue to apply for those retailers who do.”

“At Future Capital Real Estate we always believe in the relationship between us and the retailers. In case the right store sales figures are not shared, the relationship shows signs of strain and it is likely that the minimum guarantee numbers then tend to become so high that they almost seem like pure rental numbers,” says Joanna deSouza, president, Future Capital Real Estate. “In the Indian market, where the trend seems to progressing in the right way, incorporating revenue shares into the rental structure, it will become very apparent in the close-knit circle of developers, the names of those retailers who circumvent from sharing the right figures. Those retailers in the long run will realise that they are being offered pure rental deals as opposed to a MG/revenue share deal. Hence in the retailers’ long term interest, it is best that they are upfront right from the start and work hand-in-hand with the developer to make the mall a more successful shopping destination,” she adds1.

Viney Singh, MD, Max Hypermarket India Pvt Ltd, says, “A revenue share arrangement by definition means that there has to be transparency in sharing of sales data between retailer and developer. If a retailer does not want to share sales figures, this cannot work. In which case a straight rental model is the option to follow.”

*For whole article please refer to IMAGES Retail magazine of Sept’ 09

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