The Indian Shopping Centre Industry is reeling under the pressure of repayments to banks, even as revenue streams dry up and no relief seems to be coming from the government amid the coronavirus pandemic that has forced malls across the country to shut down for non-essential items. Since Food, Grocery, pharmacies and restaurants were allowed to operate for takeaways and deliveries for some part of the day, shopping centres housing such stores had to remain functional but at very high cost with additional overheads towards screening, sanitization and maintaining social distancing norms.
The industry, which had written to the government seeking financial help, is now struck with several banks writing to mall owners directing them to deposit rental payments for the month of April in Escrow accounts against lease rental discounting facility availed by the industry players. It is pertinent to note that of the 650-odd organised shopping centres across the country, more than 550 are single owned by standalone developers. In addition, there would be some 1000 malls of less than 100,000 sq ft also in Tier 2, 3 cities that face similar fate. Till only a month back these malls were the only social spaces of these city dwellers and the hotspots for visiting guests.
Several banks have invoked contractual obligations under the lease rental discounting (LRD) facility and directed companies to fulfill its obligation, raise invoices for the month of April 2020 and ask tenants, largely retailers, to make rental payments in the Escrow account of the Bank.
The Shopping Centre Association of India (SCAI) believes that this is just the beginning and other banks are likely to follow suit which will result in a significant amount of defaults leading to NPAs in the very near future. These demands are expected to put the shopping centres industry in great financial distress, impact more than 50 percent malls across the country and lead to loss of lakhs of jobs that are dependent on the shopping centres industry.
The industry has been seeking government intervention and has already written to the Finance Ministry, RBI and the IRDA. However, the government is yet to take cognizance of this.
Amitabh Taneja, Chairman, Shopping Centres Association of India said, “This is just the beginning of NPAs. Unless the government intervenes, we are staring at a scenario of defaults exceeding Rs 25,000 crore+. We are a capital and people intensive sector. Millions of livelihoods are at stake if the industry does not get the necessary support from the government. The situation is similar to shopping centres industry getting admitted into intensive care units with urgent need of oxygen to survive.”
The nationwide lockdown has put huge financial stress on organised retail in India, which has a direct bearing across several segments of industry including textiles, fashion, entertainment, electronics, non-essential consumer goods, etc. to name a few. Considering 85 percent of total revenue is from rentals, the revenue has come down to zero on account of the centres being closed in view of the complete lockdown, while they continue to bear a high fixed cost towards salaries, Common Area Maintenance (CAM) charges, utilities and ongoing routine expenses. In addition, their debt serving, and interest payment obligation remains.
Financial institutions should consider allowing a moratorium period in repayment of bank loans, interest, EMI, etc. without levy of any penalties including penal interest, plus, one-time loan restructuring with lower rates of interest may be permitted for shopping centres.
Taneja added, “While the RBI has taken measures of bringing the rate of interest down to 9 percent; fact remains that it is still unaffordable at this point. We should be looking at 5-6 percent in these difficult times. Moreover, the moratorium offered should be extended till 31st March 2021 at the minimum.”
SCAI has urged the government for the following:
– Provision of short-term financing option for a period of 6 to 12 months, at lower interest rates to meet the increased working capital requirements.
– Immediate attention towards granting GST rebates to offset the losses on account of and for the period of closure of business and/or in the alternative permit flexibility in deposit of Goods and Services Tax (GST). Since GST needs to be deposited immediately upon raising of invoice, however, corresponding payments are likely to be delayed, resulting in an additional cash flow burden on shopping centres.
– SCAI has also made an appeal to State Governments to extend the validity of existing operating licenses of critical permissions/ licenses/ NOC’s (like Trade License, health, excise license, shops & establishment, various NOC, license for signages etc.) of retailers, restaurants and shopping centres for an interim period of 3-6 months.
SCAI feels that these measures need to be taken urgently if the fate of millions of livelihoods is to be protected.
Now shopping centre owners – who have waived off retailer rents for the next few months are at their wits’ end, some even facing closure. The worst hit are shopping centres situated in Tier II and beyond.
“A major problem is that the net cash is coming out of our pockets now. We cannot bear these costs for even up to a month. Once malls open, then operating costs will also go up while the number of visitors in malls go down due to social distancing and general distrust of public places. Meanwhile, other costs like cost of sanitization will go up. More than anything else, it will take a lot for shopping centres to rebuild consumer confidence. Revenues will be low because of lower consumer spending due to this low confidence. On the one hand we will have depressed revenue and on the other hand we will have higher costs and this will definitely impact the functioning of the mall,” says Shrirang Sarda, Director, Nashik City Centre Mall.
“We have currently asked our banker to waive off interest for the period Mall has been shut. LRD is a model completely based on rental inflow. As the rentals have stopped due to a pandemic, the banks should waive of interest for this period. This is something all developers need to take up to their respective banking partners. Government intervention is must to put the necessary pressure on banks,” says Mangesh Parulekar, Promoter – MP Group, Orion Mall Panvel.
What is LRD
“Owning a commercial or residential property in India comes with its share of advantages – the principal one among them being that the property owner is able to lease out the premises to earn rental income. Apart from monetizing the property, the rent receivables also yield an additional benefit to the owner: he can raise a term loan against the rent for personal or business intents. This loan is known as Lease Rental Discounting (LRD) and is approved against the discounted rental cash flows from the property and its current market value.”
How Does LRD Work?
“Lease Rental Discounting (LRD) loans work on the premise of rental properties being owed a fixed amount of rent. Tenants enter into a lease with the owner of the property. This agreement mandates a regular payment which is known as rent. The property owner can use rental receipts drawn up for the duration of the lease as collateral while applying for a loan”
According to Arijit Chatterjee, COO, Junction Mall, Durgapur his mall has waived the rents for retailers but at the same time is facing the problem of absolutely no cash flow. In fact, the situation, he says, is so bleak that bank EMIs and other taxes which need to be paid are now at stake.
“The central government has given us a timeline of three months – March, April and May – but by the time they declared this, the EMI for the month of March had already been deposited. So, we as mall management are left with two-month benefits only. And one can hardly call this a benefit since we have to pay a higher interest for this period and also, we are not in a position to deposit EMIs from our pocket. This Covid-19 situation is going last for at least 6-8 months and bearing the cost until that time from our pocket will be a tough task,” he adds.
Chatterjee says that even if his shopping mall gets operational in two to three months from now, customers will not come to malls as they were used to. There will be a huge change in the shopping behavior of the consumer. “Also, if retailers do not do business they will not be able to pay the rental and we will have to support them at that time as well. The property owners will suffer much more than the rest. We cannot leave our property as it is. Even if no one is coming, we have to maintain our property. A lot of staff cannot work from home including security, housekeeping and maintenance teams who are still working in malls. We have to pay for their salaries as well. Ultimately we are suffering a lot and this situation is going to be there till the next financial year,” he states.
“Mall owners will not be getting the rent for the lockdown period even if it means getting into civil litigation with the retailers – which can take years to settle. Our outflows will be EMIs, interest on these EMIs, minimum electricity bills, property tax, municipal tax, water tax, salaries, and maintenance cost of the mall. Even though we have closed the mall, once in two days we have to clean the mall and run the generators, and this is a huge cost. So, we will incur huge loss,” explains Machani Gangadhar Gopala Krishna, Joint Managing Director, MGB Felicity Mall.
“Even after we re-open, the operation cost of the mall will go up as we have kept the sanitization of the mall up to the mark for this entire period. If we have to win consumers’ confidence and convince them that the mall is a safe place, it has to be extremely neat, it has to be sanitized. We are also planning to install sanitization booth which will cost around Rs 1.5 lakh. Training cost of the employees, their sanitization and masks will add to the operating costs,” he states.
“We are simply going in losses as we cannot leave our shopping centres. We are just going into loss,” he adds.
Amit Gupta, Owner, Iscon Mega Mall, Ahmedabad, says, “These difficult times have severely impacted the liquidity for both mall developers as well as retailers. Employee salaries and related benefits are the topmost priority for all of us associated. Demand is expected to be heavily subdued at least for the next 3-6 months. If the government doesn’t provide a strong relief package for the Industry; the sector is expected to see huge job losses and liquidity issues.”
“The moratorium has been a temporary saviour at this time. Even though the interest would cost additional burden on us, we are fully aware that this is a situation in which we need to support the retailers. However, we also have a lot of expenses which pull down the business and we need the government to be a buffer here. While retailers have got rent relief by the government, shopping centres themselves are not receiving any relief. It is imperative for the government to support malls at this scenario to save the industry,” says Muhamed Fawaz, Assistant Director, HiLITE Builders.
Amit Tekriwal, Director, Amit Realty Group (Bokaro Mall) says that every mall has a separate Lease Rental Discounting (LRD) loan and the situation related to it is very grim. “We have three months moratorium from the government side and we also have received a letter from the retailers’ side that they won’t be able to pay the rentals and CAM fee. We ourselves have not been able to raise the invoice for the month of April for the minimum guarantee or the rental part. So far the larger retailers and multiplex in the mall have decided not to pay the rent due to the COVID 19 crisis. Only a few malls have confirmed on that rental waiver thing and most of the malls are still silent on this topic and waiting for the situation to improve. We have so far raised invoices for CAM and electricity. As far as rent is concerned, we will see how the situation unfolds and in principle we have decided that any decision taken shall be fair and reasonable for all parties concerned.”
He explains that there are other major challenges like electricity bills where shopping centres have to pay a minimum charge whether they utilize electricity or not. “There has been no rebate or extension in time for paying up the electricity bill. Besides this we have to spend on the mall maintenance, housekeeping and security. We also have to pay the salaries of employees and ensure safety measures for those who are working in the mall despite it being closed for now,” he states.
Arijit Chatterjee agrees saying, “Paying electricity bills is a major problem. We were unable to pay the bill for the month of March and right now there are other taxes as well. Our entire taxation and electricity bills are pending, and we are not sure how to pay them at this moment.”
As per Niyas Ahmed, Director, Mall of Tranvancore, the Malabar Group has announced a rental waiver to all tenant partners in Mall of Travancore from the month of March onwards, keeping in mind the commitment and well-being of the community and the industry. “Regarding the EMIs to the bank we have honoured and paid the Bank EMIs till now but going ahead we need the support from both the government and the banks.”
Seeking Government Support
As most malls are completely shut and there is no revenue generation, malls are looking for government support to tide over this Black Swan event.
Mangesh Parulekar says the shopping centre industry expects the following from the government in this crisis situation:
– Flexibility in GST payments
– Discounted GST rate on rentals and Common Area Maintenance for at least a year
– Waiver of Property Tax for the closed down period. Discounted property tax to be charged for the period of 1 year post commencement of mall operations
– Discount in signage tax
– State authority should instruct electricity boards to reduce the rate per unit for shopping malls
“This financial year had started on a very negative note but the remaining part of it will be all about revival. The government should focus on monetary policies to boost the customer spending and increase liquidity in the market in order to recover the economy. The recent monetary policies taken by RBI will be helpful, but the industry needs much more. As a temporary relief, the government should offer notional rent to sustain the minimum expenses for the malls,” says Muhamed Fawaz.
“In this situation the government should not impose extra interest rate and the relaxation given by them for a period of three months should extend up to the entire financial year,” adds Arijit Chatterjee.
As per Shrirang Sarda, shopping centres have a fair amount of fixed cost, fair amount of fixed compliance and liabilities and there is zero revenue. So, only the government can interfere and help us here. In general, retailers also have a stress balance sheet because of the same reason, they also have fixed costs, they also have perishable inventory, so they are also stressed. The consumer buying behaviour is also going to be stressed. The only one who can do something about it is the government.
“We want the government to lower our costs, give some flexibility in terms of costs including property tax, and we also want the government to help in confidence building measures where malls can be seen as a relief for people in stressed times. Malls play a special role in today’s economic and social environment and the government should recognize this and partner with us for confidence building measures,” he adds.
As per Bokaro Mall’s Amit Tekriwal, the shopping centre is looking for support from the state and central governments on interest and taxes. “We have written to the electricity board and are waiting for their response. We look for more support in terms of extension of time in relaxation.”
“The government should wave the interest of the term loans and if the government is not in a position to do so in the lockdown period, it should reduce minimum 5-6 percent interest for at least the next 18 months. Even after the lockdown period, for our shopping centres to revive, we need a 6-8 percent interest waiver. We also need GST relief on the whole retail industry so that it will encourage customers to spend,” says Machani Gangadhar Gopala Krishna, adding, “We are bearing expenses from our savings and these savings will erode down in a month. So, we want the government to intervene at the earliest possible.”
Niyas Ahmed adds that Mall of Travancore is dependent on the government for all taxes and bills, and therefore urgent relief measures must be given to them. “Moratorium on bank loans have to be continued for a longer period – at least until the shopping mall market situation comes back to pre-Covid times. This will enable malls to manage cash flow to a certain extent by stopping EMIs which have to be done without levy of any penalties. In addition to this the bank loan interest rate to be brought down to an affordable range. Moratorium on GST payments, waiving off fixed charges on electricity bills and local body taxes have to come from state and central governments. This will help us in saving jobs by enabling us to pay staff salaries, secure our asset and manage CAM expense even with zero revenue.”
“The government needs to understand that malls generate a massive amount of employment and if these measures are not taken, then a large number of people will be affected. A lot of other businesses (food delivery, labour, auto rickshaw, taxis, etc.) are largely dependent on the functioning of malls as well,” concludes Parulekar.
Shopping Centres: The Lifeline of the Modern Retail Industry
The great Indian shopping mall boom began innocuously enough in the early 2000s, with just three malls in existence in the entire country. Twenty years later, the number has mushroomed to a whopping 1,000+ malls, enabled by the fact that the Indian audience discovered clean, vibrant, climate-controlled and technology-enabled malls, replete with a plethora of brands.
The shopping centre industry in the country took a hit with the advent of e-commerce in the early 2000s and then the due to the effects of recession of 2007-2008, the economic slowdown, demonetization, FDI rules as well as the coming of GST. There even came a time when developers were forced to shut down ‘dead’ or ‘ghost’ malls.
Despite the hurdles, investment firms saw India as a gold mine and mall developers did not lose focus, working doubly hard to ensure that their footfalls didn’t go down. Malls mushroomed in Tier II & III towns and cities, becoming an integral part of small city life for socializing, shopping leisure and entertainment. These centres have not only helped catalyse the growth of modern retail in India but have also helped pushed infrastructure growth, economic and social activities around their vicinities and adding to government’s revenue through various taxes.
Several other periphery industries have flourished in making and managing of the 650-odd operational malls in India. In fact, as per an Anarock report, more than 100 new shopping malls covering nearly 66.5 million sq. ft. of area were expected to come up across India by the end 2022 – plans which have come to a screeching halt in the face of the Covid-19 pandemic with further Rs. 28,000 crore investment stuck in the pipeline in additon to the cost of land.
~ With inputs from Charu Lamba, Sandeep Kumar & Surabhi Khosla ~