The retail real estate sector that comprises mall operators is once again facing considerable challenges on the back of the second wave of COVID-19. Footfalls are down to 35% to 50% depending on the geography and the intensity of the curbs.
The net operating income of mall operators is also expected to be hit by fresh localised restrictions, ICRA said in its recent analysis.
The weakening financial profile of tenants, particularly of highly impacted sectors, such as multiplexes, family entertainment centres, food courts and restaurants, is further exacerbating the situation. Thus, rental collections are likely to remain under pressure, at least over the near term, it said.
In the absence of any support to the retail realty sector, such as the moratorium on debt obligations, which was available during March-August 2020, the extent of liquidity and financial flexibility available with mall operators will remain a critical determinant of their ability to tide over the cash flow disruptions.
Larger players, with strong parentage, healthy balance sheets, and better credit availability, are expected to be better positioned to manage the growing risks, it said.
“The net operating income (NOI) of mall operators is getting hit by the fresh localised restrictions being imposed by states, which, in turn, is further impacting debt coverage and protection metrics. The larger players were able to tide over the earlier disruptions on the back of diversified revenue streams from varied segments, available liquidity and strong tenant profile,” said Mahi Agarwal, sector head and assistant vice president at ICRA.
Smaller players, however, faced challenges given their lower diversification and portfolio strength, limited liquidity and credit availability. With the onset of this second wave now, overall sectoral stress is increasing. Though the effective vaccine rollout is expected to serve as a strong mitigant to these risks, ramp-up of the same remains to be seen. Absence of support measures, such as the debt moratorium, and reduced liquidity levels, given the utilisation of such funds during FY2021, further exacerbates the risks, she said.
According to an analysis by ICICI Securities, given the second wave of COVID and increasing restrictions or lock-downs in various Indian states/cities, especially in Maharashtra, all shopping malls across Mumbai and Pune will remain closed from the beginning of April 2021 onwards until the lockdown continues. In FY21, most mall developers had offered a 50% waiver for the year and as per agreements with most retailers (barring multiplexes), mall rentals were to revert back to pre-Covid minimum guarantee levels from Q1FY21.
However, the fresh round of lockdowns may lead to another round of rental negotiations/waivers having to be offered by mall owners in FY22E as well, it said.
Rajneesh Mahajan, CEO, Inorbit Malls and director, Shopping Centres Association of India (SCAI) told Moneycontrol that the second wave of COVID-19 and the restrictions across states has led to footfalls dropping by half.
“We were at 80% levels but today we are down to anything between 35% to 50% from the levels we were in the first week of March because maximum traction in malls is over the weekends and in the evenings. Currently, some states have imposed a weekend lockdown, some have imposed night curfews and others have a full-fledged lockdown in place,” he said, adding the clock is being reset yet again.
But he hopes the ramp up is faster this year than last year. The first category reopened in June (essentials and F&B) and the last category (multiplexes) in the month of October. “I hope sales recover and resumption in consumption takes place by July.”
However, the financial health of businesses are weaker this year as profitability took a beating last year. “It is going to be tough for mall operators, individual property owners and retailers this time around. Smaller players will experience higher pain as their vulnerability is higher,” he said.
As for which segment is expected to bounce back first, he is of the opinion that unlike last year when the electronics segment did well as everyone prepared to get settled in the work-from-home mode, this year consumers are well prepared.
“Whoever required a laptop, a cell phone, a printer purchased one last year. While the gap has been filled last year, there will still be categories that will be the need of the hour,” he said.
As for rental waivers, he is of the opinion that the situation is not as bad as last year. “Most malls were charging full rentals for the last quarter. We were recovering well and were back to nearly levels before the pandemic stuck. Today, we are not having discussions as we had last time. Everyone is patient and not as anxious as last year with regard to contracts,” he said.
Most retail rental contracts are long term contracts ranging from 3-12 years, and hence emergence of a new rental arrangements is not possible, he added.