Unlock 1.0: Retailers, malls lock horns over rent; Future Retail's Rakesh Biyani bats for viable model

As retailers and mall owners gear up to reopen on June 8 after a lockdown of almost three months, a new flashpoint has emerged in the tussle between retailers and mall owners.

Many retail tenants are in discussions to restructure deals on revenue-sharing arrangements with mall owners to mitigate risks arising from a decline in footfalls due to COVID-19.

However, many mall owners said they have taken lease rental discounting (LRD) from banks for 9–10 years and if rentals decline, mall owners may need to top it up to avoid bank defaults or ask the banks to spread/extend the discounting tenure. This too is complicated as the Reserve Bank of India's intervention may be needed to restrict it for classification as non-performing asset (NPA).

Most tenants are looking for a full rental waiver during the lockdown period and a possible pure revenue share deal until December, or for that matter, the entire financial year.

Retailers and mall owners have already suffered huge losses due to the lockdown of almost three months. So, operating retail stores at pre-contracted rents will only add to the losses of brands and retailers.

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Most retailers are of the view that malls attract the best footfalls, thus typically have higher rentals also. Unfortunately, under the current environment, malls may not be able to get the traffic to justify the higher rentals.

Rakesh Biyani, Managing Director of Future Retail, said only about 40 percent of the malls are likely to become operational on June 8. All major metros have still not announced the opening date for malls.

Biyani agreed that for all brands and retailers, malls are an important location for sales, thus opening of all malls is important.

However, he pointed out that brands and retailers are also worried about continuing at the old costs, without supporting footfall.

“The entire retail industry has been hit hard by the lockdown. Operating retail stores at pre-contracted rents will only add to the losses of brands and retailers. Thus it is imperative that malls, brands and retailers collaborate to create a financially viable model for all stakeholders," Biyani told Moneycontrol.

“Through collaboration, the retail industry can become stronger and will be able to grow organised retail as we enter the post-COVID world sometime very soon," he added.

Mall owners are of the view that a one-size-fits-all approach may not work as the agreement with every tenant is different.

“A one-size-fits-all approach may not work as the agreement with every tenant is different and therefore, there is a need for a mix of partial waiver, waiver of minimum guarantee, renegotiated rates and revenue sharing arrangements with tenants to mitigate business loss,” said a mall owner which runs two well-known malls in Mumbai.

“We are in talks with all our tenants (retailers). Hopefully, before June 8 it should get resolved. But one should remember that malls have an LRD (lease rental discounting) commitment to meet and a large part of the rent goes into honouring these commitments,” another Mumbai-based mall owner said.

Besides, the bigger issues facing the sector today are getting footfalls back and generating revenues.

With social distancing norms, malls owners fear that they may not be able to attract as many footfalls as in the past.

A mall is a destination for shopping, eating, entertainment and events. With the opening of malls, shopping will open, but it is going to take some more time before eating, entertainment and events will open, the mall owner stated.

Like China and Germany, there is the possibility that pent-up demand may be witnessed. Consumers may have the urge to venture out gradually, and we may witness some amount of activity at malls and other shopping destinations as a consequence.

“Indian consumers may not embark on a shopping spree of non-essential goods immediately once the lockdown has been lifted, but if consumers refrain from buying bigger ticket items, demand for small-ticket items could certainly go up, potentially supporting footfall,” said an analysis by Motilal Oswal Research.