Mall revenues to plunge 50% due to Covid

Though the government is gradually lifting restrictions, multiplexes and restaurants are still closed, which will have a bearing on mall rentals and income. (Representative image)

The Covid-19 outbreak and the ensuing nationwide lockdown completely disrupted the retail and hospitality sectors, with its cascading effect expected to adversely impact the revenues of mall operators, which Crisil predicts are likely to decline by 50% in the current financial year.

Analysing the performance of top 10 malls, Crisil said the pandemic-driven lockdown forced malls to shut down restaurants, multiplexes and other retail stores, thereby impacting operations. Though the government is gradually lifting restrictions, multiplexes and restaurants are still closed, which will have a bearing on mall rentals and income.

The ratings agency, however, noted, “These malls have total rated debt of around Rs 4,200 crore and cover 7.5 million sq ft, with pan-India presence. These have strong sponsors and high debt service coverage ratio (DSCR) of around 1.5 times on average. Hence, notwithstanding pressure on revenues, impact on credit quality of Crisil rated malls is expected to be limited in near term.”

A major part of the impact on mall revenues is due to multiplexes, food courts, restaurants and gaming zones still being closed. These businesses, which contribute around 22% to total revenues, have borne the brunt of the impact on operations due to social distancing and are also expected to take the longest to recover.
In other categories like apparel, cosmetics, electronics and bookstores, which contribute about 75% of mall revenues, the consumption is still low at 30-35% of previous year’s numbers in the first month of operations after reopening.

“With revenues dented and recovery expected to be slow, these businesses have started renegotiating their contracts with mall owners — for waivers in lease payments, or discounts over the period of lockdown and in the medium term — thereby impacting mall revenues,” Crisil said.

On rent waivers, Crisil senior director Sachin Gupta said, “We expect a 50-100% lease waiver for the period of lockdown, followed by a 30-50% concession in rentals in the current quarter and the next, which will reduce to 0-20% in the quarter to March. A gradual build-up in revenue can be expected from the current quarter, though for the fiscal overall, a revenue loss of 45-50% appears to be in order. The loss would get bigger if the lockdowns are extended or are reimposed.”

Malls also face risk of cannibalisation of revenue by online platforms. Increasingly, as customers get accustomed to online spending during the lockdown, there is a risk of some not returning to malls due to change in behaviour patterns. This could lead to higher vacancies and pressure on rentals, Crisil explained.

“Crisil expects vacancies to inch up to over 10% over the next 12-18 months compared with 4% as of March 2020. Mall owners may need to give deep concessions to keep their tenant profile intact and may even need to shift to a 100% revenue sharing model,” it said.

The current revenue stream includes a minimum guaranteed rental along with a portion from revenue share. Revenue share contributed around 14% to revenue in fiscal 2020, while the bulk was from minimum guaranteed rentals.