Rentals of mall operators expected to decline by 20-25% in Q4 of FY22: ICRA

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The resurgence in fresh COVID-19 infections and resultant curbs by various state governments has yet again stalled the recovery of shopping malls in the country, indicated a note by ratings agency ICRA on January 25. The footfalls in the malls are witnessing a declining trend from the first week of January 2022 with restrictions in major cities such as closing dine-in for restaurants, occupancy restrictions for multiplexes and their closure in few cities along with weekend curfews. This is sure to impact the rental recoveries for Q4 FY2022 and thereby FY2022, said ICRA.

In a statement Anupama Reddy, sector head, corporate ratings, ICRA, said “The trading values are expected to decline to 60-70 percent of pre-COVID levels in the fourth quarter (Q4) due to third wave as against recovery of over 85 percent in the third quarter (Q3). The rental recovery for Q4 is estimated to be at 70 percent of pre-COVID levels as against the earlier estimates of over 90 percent levels. Also, the rental recovery for FY2022 is expected to be up to 70 percent of pre-COVID levels, as compared to earlier estimates of up to 75 percent recovery. However, the recovery post third wave is expected to be faster than the previous waves with short-tenured restrictions and expected quick ramp up for major tenant – multiplexes, as content line up remains robust with several big-budget movies ready for release.”

With the estimated rental recoveries over 85 percent of pre-COVID level, according to ICRA, Q3 was the best quarter for the mall operators since the onset of the pandemic. The recovery was driven by pent-up demand, high vaccination coverage, resumption of multiplexes which also coincided with the festive season.

While certain store categories such as hypermarkets, electronics and fashion and beauty have done extremely well with certain brands even exceeding the pre-COVID sales, tenants such as department stores and food and beverage are observed to have moderate recovery in line with the improvement in footfalls in Q3, said ICRA. “The trading values for these stores would be impacted by the third wave in Q4FY2022. Multiplexes will be the most impacted segment due to deferred movie releases,” it added.

Overall, the majority of the categories are expected to reach near-normalcy by the Q1 of FY2023 as against the earlier estimated Q4 of FY22 with variance depending on the mall or brand-specific factors.

Commenting on debt coverage metrics, Reddy added, “Weaker first half of FY22 due to the second wave and expected reduction in recovery in Q4 due to the third wave of the pandemic is expected to impact the full year FY22 debt coverage metrics. The projected DSCR is estimated to be in the range of 0.70-0.75 times as against earlier estimates of 0.80-0.85 times. The support from sponsors, debt service reserve, and undrawn credit lines (for few issuers) have helped ICRA rated malls in meeting their obligations during the H1FY2022. With improvement in rental recoveries, there was no significant shortfall or major dependence on sponsors in Q3. However, with 20-25 percent reduction in rentals in Q4, the malls would again be reliant to some extent on available bank balances and undrawn lines, in the absence of which timely sponsor support will be critical.”