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Quintessentials of Leasing a Mall

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Leasing a mall is not the same anymore, with soaring rentals, reducing spaces, stiff competition, and changing consumer perceptions and consumption habits. Mall owners and developers are coining in newer and attractive ways to lease in spaces.

People are beginning to see the upside of shopping in the comfort of a mall and that is what has been driving the mall culture in India. With a fair chance to all – small and big retailers alike – everyone is trying to get their space in malls today. However, their entry largely depends on the market, the brand equity, new concepts, brand value, management of the mall and, above all, how a retailer is convinced of the potential business and sales being generated from the brand.

The shopping centre architecture is pre-planned as a merchandising, accessories, entertainment or food selling unit with various brands showcasing their products. The location is picked by the developer for easy access to pull customers from the nearby vicinity. Also, to finance or lease a centre or a mall, the developer needs major leases from companies with strong credit ratings. The developer chooses those retail tenants who have the triple-A ratings of national chains, good business records and proven understanding of the market.

Location and size of the mall are very important before the mall is leased out. It must serve the needs of the catchment area. Retail space within the malls is usually rented on a ‘net lease’ basis, which means that the retailer has to arrange for most of its services. With exception to if the premise is tied to the building’s mechanical systems, the costs for most services, such as heating and air-conditioning, is the responsibility of the retailer. Generally, the agreement deals with rental, revenue share, if any, cost of maintenance, tenure, scope of work and various statutory taxes from either party. In shopping centre leases, a retailer is customarily charged for maintenance of common areas and for the mall’s marketing efforts or for any structural alterations or remodelling, resurfacing the parking lots, or replacing the roof, etc.

According to C&W, mall rentals increased by 7–10 percent in Lower Parel (Mumbai), South Delhi (NCR) and Gurgaon (NCR), primarily due to high persistent and low availability of space. In most non-shopping centre locations, rent is a fixed amount that has no correlation to sales volume. In a shopping centre, the rent is usually stated as a minimum guaranteed rent per square foot of leased area against a percentage. Typically, this percentage is between 5 and 7 percent of gross sales, but it varies by type of business and other factors. The rentals format differs across various retail formats and they depend on factors like where retailers are placed in a mall, which are the brands alongside it, etc.

Lately, most of the malls have adopted the ‘Revenue Share’ model, where they pay a minimum guarantee and then share the profits once they cross a pre-decided sales figure.

Depending on the catchment and target audience, mall plans the mix of value, premium and luxury brands in the mall with a special focus on the right mix of anchor and vanilla store. Right size of food court and entertainment centre is also very important for success and leasing of the mall.

In an ideal scenario, mall developers do prefer to have a purely lease model because that gives them a better control over the functioning and operations of the mall. Based on the vision of the mall, quality of the asset, validation and research, the brands are then finalised keeping in mind the demographics and psychographics of the catchment. In fact, once the mall is fully operational, there are periodic checks done in various malls to see which brands are performing and which ones aren’t.

It is always challenging for malls to lease space to new and young brands. Many malls have temporary tenants as kiosks and carts. Roughly, every mall has 20–30 carts and kiosks to add colour and variety, as well as to generate income. Entrepreneurs can set up their carts or wares in a prime, high-foot-traffic location with little investment. Some cart operators move in only on busy holiday seasons, as compared to others. Categories like cosmetics, artefacts, handicrafts, trendy accessories, mobile salons, imported toiletries, etc. find carts and kiosks a low-cost way to launch a retail business or to supplement an existing business. Rent for in-line stores is about four times the rent for carts and kiosks.

One of the key problems that the industry faces is that malls are built by real estate firms and many of them are not accustomed to creating spaces, as their focus lies not in leasing out but in ensuring customer footfalls. This affects the design of spaces, and at majority of malls, the spaces and dimensions compete with commercial and residential spaces in the locality. The formula for success is what industry insiders like to call the ‘right mix’ – a good location, great tenants, balance of tenant sizes, and some compelling competitive advantage for a mall.

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