Coronavirus lockdown | Mall owners say one-size-fits-all approach for rent waiver may not work

The real estate segment is likely to experience maximum pain in the retail sector with the country under lockdown now for nearly 45 days. Tenants have started discussions with mall owners seeking rent waivers. Mall owners, however, say they prefer to wait until the lockdown is lifted to decide on their next course of action rather than agreeing to an immediate rental waiver of 15 percent to 20 percent,

A one-size-fits-all approach may not work as agreements 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.

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.

Realty developer Lodha Group has offered full waiver for its retail partners who would be exempted from paying rent since March 15, until the government permits reopening of retail operations.

According to an analysis by Motilal Oswal Research, there could be resistance to renegotiations and the possible consolidation of retail real estate as many mall owners too may have liquidity woes.

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Associate Editor, Real Estate|Moneycontrol News

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Many mall owners have taken lease rental discounting (LRD) from banks for 9–10 years. 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 RBI intervention may be needed to restrict it for classification as NPA.

The retail associations have sought government support for tax deferment, property tax/minimum electricity waivers and wage subsidies, and longer interest moratorium or tenures for payments. They have demanded that property taxes and minimum electricity charges be waived for the duration of the lockdown, and extended interest moratorium and loan relief should be offered to mall owners so they can support retailers.

“The government should support the waiving of lease payments. In Singapore, the government has waived lease payments for government-owned properties and many others. The government could co-share wages, similar to Bangladesh, or provide loans at a lower rate to offer wages with the option of a moratorium. The government could also reduce GST rates, currently at 12–18 percent, which could be passed on to customers to boost demand,” said the Research.

What retail tenants want

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.

“This is our only possibility for survival,” said Nitin Bansal, Head, Business Development at MINISO Life Style.

Kinzal Vadera, Founder of The Soup Bowl agreed. “We are also in talks for a minimum guarantee or revenue share or whichever is higher. In good times when we did more business, we paid the landlords more than the minimum guarantee. Now we need their support. Currently, since our revenues are almost nil, a full waiver should be given to us as we are under immense pressure.”

The Multiplex Association of India has also demanded a relief package for the industry in the wake of COVID-19 outbreak. In a letter to the prime minister, they have asked for interest-free loans for three years with a one-year moratorium to multiplexes immediately to help them tide over the crisis and prevent any kind of default on salaries, electricity dues, loans and interest repayments.

They have also called for exemptions on all taxes - including GST, Show Tax, Local Body Entertainment Taxes and Property Taxes for a year from the date of resumption of normal cinema operations as also a waiver of minimum demand charges on electricity.

Landlords’ take on the crisis

While some mall owners insisted they don’t see renegotiation or softening of rentals at this stage, there are others who are of the view that one-size-fits-all strategy such as waiving off rent for all tenants may not work for all. Besides simply putting off rents, it is reopening of malls and subsequent revenue generation and regaining footfalls that is important.

“We are in talks with all our tenants. It should be remembered that malls have an LRD commitment to meet and a large part of the rent goes into honouring these commitments,” explains Dalip Sehgal, CEO Nexus Malls.

Having said that, there are no solutions on the table yet.

“That’s because we are still not sure when will malls be permitted to reopen. Closer to the time when we know that we have been granted permission, we will sit across the table and decide on a viable solution,” he said.

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

“Restoring revenue is much more important than negotiating rent waivers. Just by seeking a reduction in rent, the pain may not be reduced. Also, every category would require a different solution. We would have to figure out the commercial terms that would work for different clients as terms are different for all. Some have signed up for revenue share, others for minimum guarantee. Some have a one year lease left, others have an eight-year lease. Therefore, a cookie-cutter approach of waiving 20 percent rent is not going to work,” he says.

“If waivers were the solution, we would all be sitting happily, hoping that business would bounce back to normal when malls reopen,” he said.

Harshavardhan Neotia, Chairman of Ambuja Neotia Group also agreed. ‘We have also had some conversations with our tenants but no conclusive conversations. We are waiting for the lockdown to be lifted and malls to reopen.

“Mall owners also have financial commitments to lenders and we are hoping that some support may be given to the sector by the government either in the form of a moratorium or on repayment,” he told Moneycontrol.

He said the rental income projections would be lower than last year.

Asked whether his company would want to invoke the force majeure clause for the lockdown period, he said they would much rather work in a spirit of collaboration and arrive at a solution with tenants.

Uddav Poddar, MD, Bhumika Group believes some sort of revenue sharing model for a few months until customer traffic is restored should be discussed between the two parties.

Amitabh Taneja, Chairman, Shopping Centres Association of India (SCAI), said modern retail is built though financing through LRD and that the RBI has to resolve this problem with loans to create a model wherein the moratorium could be extended even to retail by nine months or a year.

“If the rent does not come in, these will be called NPAs. Mall owners have to estimate real damage. Also, waiver with each tenant would have to be worked out with every retailer independently depending on the size, category and the brand’s requirements,” he said.

DLF Rental Businesses refused to comment.

Likely retail sector trends after the lockdown

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.

Also, as soon as lockdown is lifted, retailers may look at liquidating their inventory, even offer discounts if needed.

Fresh store openings may be significantly fewer as retailers may look to limit their capex. There could also be restrictions on footfall at retail destinations with a high population density even after the lockdown as social distancing norms may be extended.

Both domestic and global brands may defer new deals, considering uncertainty until the time there is stability in footfall.

Mall owners may also postpone new projects. As per pre-COVID-19 ANAROCK estimates, there were plans to complete an around 8.4 mn sqft mall space across the top seven cities in 2020. However, given the possible delay in new store openings and the dearth of labour needed to complete the projects, the planned new completions across the top seven cities may drop to 30– 50 percent of the overall expectation in FY20.

Also, developers and investors may postpone new mall additions in tier-2 cities as investment or acquisition opportunities may emerge in tier I cities.

Post-lockdown strategies by mall owners to boost revenue

Most landlords and tenants have already firmed up strategies to ensure social distancing norms are implemented after the lockdown is lifted.

According to Neotia, every stakeholder may have to take a hit for the short term before things ‘crawl’ back to normal.

“Peoples’ incomes may get impaired, some may lose their jobs while others may face salary cuts. Initially, there may be a setback in terms of customer demand and it may not be before winter this year that things may come back to normal assuming there will not be a second wave,” he said.

Hygiene protocols will have to be ensured and events promotions will have to be suspended for the next nine to 12 months.

“We will have to focus on engaging customers digitally. Also, once malls open, retailers would have to seek collaboration support from mall owners,” said an expert.

One mall owner is planning to provide additional space to his tenants for brand promotion once malls open.

“We are going to have space in the atrium for at least three or four kiosks so that social distancing norms are maintained and our tenants can get larger space to showcase their brand,” said Sehgal.

Also, after the lockdown is lifted, there may be greater demand for people wanting to either replace white goods or getting them repaired.

“We may work with some of our white goods tenants to set up a few kiosks on each floor which can help customers with emergency repairs for their durables which were perhaps left unused during the lockdown,” he said.