The past decade has seen failure of a vast number of malls across the country. The major reasons for this were – strata sales by developers, poor planning with respect to design, smaller (non-optimal) size of malls, improper location selection, inaccurate demand forecasting, shrinkage in catchments, advent of e-commerce and in most cases oversupply of spaces in the same locality. Due to oversupply of malls, the malls that were doing well initially started to suffer.

A huge number of the malls failed and shutdown, the ones which survived had to undergo a major transformation from a mere provider of space for brands to modern day entertainment hubs. A large number of cases of failure made investors shift their focus away from malls. Even developers shelved plans to build malls and the land acquired for constructing malls were either kept idle or were used for residential or office constructions.

In order to attract occupiers most of the developers agreed to go for revenue sharing agreements with minimum guarantee for their retail assets instead of fixed base rents. This was done so that mall owners would be incentivised to increase footfalls and if the malls continued to struggle then the occupiers would not have the burden of high rents.

With large number of malls going out of business coupled with no new supply, the malls which survived and could transform as per the need of the hour started commanding premiums. Occupiers/retailers started lining up to take up space in those assets. For the malls which started doing well, the revenue sharing agreements became more and more valuable. The owners were able to achieve rental growth higher than that they would achieve in the case of standard rent appreciation clauses (15 per cent every three years) in rental agreement of office assets.

The growth story for malls is not over yet. There is significant potential for mall revenues to grow on account of dearth in supply of good quality successful malls, the rising consumer demand, increasing levels of disposable income, India’s gross domestic product (GDP) growth, demographics and ongoing structural changes taking shape in select malls to accommodate new anchors and entertainment options in order to remain relevant against the competition from online retail. These factors would further propel the growth in revenues.

Despite the fact that the risk in retail assets are higher compared to office assets as retail assets need involvement in day-to-day management, the investors are still chasing prime retail assets as the scope for revenue growth is immense and possible compression in cap rates on a long-term time horizon would give them additional gains.

*For a considerable amount of time, post the Global Financial Crisis (GFC), a large number of malls in India struggled and some of them went out of business. Several retail 38assets were thriving and were undergoing transformation to become modern day entertainment hubs. It was not clear as to which malls would undergo the transformation successfully. Thus, there was a considerable lull in transactions of retail assets between 2011 and 2015 and investors were interested in acquiring rent-yielding, good quality office assets.

*As good quality, rent-yielding office assets started becoming more and more difficult to acquire due to shortage of supply, the valuations demanded by developers became steeper. With the office space supply pipeline in the most sought after business districts not being robust, the investors shifted attention towards other rent-yielding assets such as retail (malls) and warehousing. Hence, the number of retail assets (malls) being transacted increased significantly since 2016. However, investors preferred to acquire only the good quality and best performing retail assets.

*After a period of intense struggle with some of the retail assets going out of business, the malls which could successfully transform into modern day entertainment hubs are performing exceptionally well and the developers are witnessing high rental growth on account of revenue sharing agreements. The developers who are in dire need of funds for expansion or debt repayment have sold or are in talks to sell stake in some of their malls.

*Many developers in the top metros of India who are not in need of funds are still holding on to their most sought after retail assets, as the anticipated rent growth in the mall is higher than contractual terms. The developers want to pocket majority of the rental growth coming in from revenue sharing agreements. Hence, the transaction volumes for top metros of India are not significantly higher than the volume for other cities. As a consequence, investors are looking to acquire assets outside the top 4 metros.

Going forward, the potential for future retail revenue growth is still high, as the level of disposable income is expected to grow further with the GDP growth and rising consumerism.

Source: Knight Frank