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How Are Shopping Centres Embracing the COVID-19 Impact?

Jun 23, 2020 10:48 AM 3 min read
Editorial

In the past couple of weeks, several restaurants and cafes in New Delhi’s upscale Khan Market have announced that they were shutting shop.

Owners said that they had failed to negotiate the exorbitant rentals with the property owners - and that they could no longer afford to continue in India’s priciest commercial space, given the new “norms” for operating.

Fact Box: Khan Market was set up in 1956 to rehabilitate some 70 refugee families from Pakistan and a shop could be rented for ₹50 then.

With a slump in demand post-COVID, this recurrent phenomenon is being witnessed by commercial real estate across the country’s urban landscape - be it in case of malls, offices, co-working spaces, cinemas and multiplexes.

 

Between the Devil and the Deep Blue Sea

Shopping malls have been faced with a double whammy.

Mall operators are reeling under heavy losses. As per a survey conducted by the Retailers Association of India (RAI), malls witnessed 77% de-growth in the first half of June, as compared to the same period last year. Lockdown relaxations too did not prove to be of much help as there was no significant surge in business.

Lower revenues and high fixed costs have led to a drop in margins for multiple retail companies and restaurants. They have in turn initiated a dialogue with the mall owners.

The National Restaurant Association of India (NRAI), in a letter to the mall owners, has voiced their concerns over waiver of charges of rentals and a revised revenue sharing model.

To add to this is the fear of retailers no longer paying rents or terminating leases. For instance, H&M, a global fast fashion giant has used the ongoing crisis to accelerate its shift online.

Mall owners on the other hand, are faced with a cessation of revenues even as their financial obligations to external shareholders remain unchanged.

 

decline in mall footfall

 

What To Do and What Not To

This interesting piece by Financial Express outlines what mall owners must do as they seek to tide over the current crisis.

Rental Renegotiations

Given the circumstances, it is probably best for developers to rework/renegotiate their rental agreements with retailers, like some have already begun.

Phoenix Mills for instance, has worked out a three-month rent deferral programme for its tenants. Others like Inorbit Malls are giving a 50% discount on rent to tenants from April to August. DLF in the north and the Prestige Group in the south waived fixed rent for the lockdown.

Mall owners might also be required to shift to a turnover sharing agreement to provide retailers hedge against low sales volumes, thereby gaining their confidence.

Reduction in minimum guarantee for a period of six to nine months may also help.

Reconfiguration and Replacement

Malls owners must come up with an operating mechanism for the rapid turnaround of vacant shells, including expedited move-out of existing tenants, liquidation of leftover inventory, resizing of store spaces, flexible set-up for moving in new tenants (including the opportunity to tweak lease agreements for lower deposits and longer periods of free rent).

This should be in tandem with search for potential tenants. Here it might be beneficial to look beyond the large chains that have traditionally occupied space in malls and reach out to mid-to-large scale direct-to-consumer (DTC) brands that are looking to open their first physical stores, or those that are looking to expand their offline-footprint, such as Pepperfry.

Reviving the Consumer Spirit

As malls re-open, owners must prepare strategies to attract consumers post the crisis. This would not only include establishment of a robust infection prevention infrastructure but also adequate marketing to abate any fears a potential customer would have and regain the lost confidence.

Needless to say, cost implications of the above may be substantial. And perhaps one way to make it feasible will be to split the burden of added cost with retailers—as an addition to existing common area maintenance fees.

The Bottom Line

The fact of the matter remains that given the current circumstance, both retailers and mall owners have to co-exist.

The attention, therefore, must be to support and drive business such that every one in the value chain is benefited at the end of the day.

FIN.

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