Soaring rentals pose another headache for retailers

With quality spaces hard to come by, retailers are finding rentals rising at alarming speed  — a big change after two years of price correction that began in late 2008.

And adding to the demand-supply gap is the metro-skewed expansion of retailers due to which rents have soared as much as 50% in recent months, some complain.

The going is tougher for new retailers because landlords and developers are picky about choosing brands to house in their malls.

“Yes, availability of quality retail space is a challenge,” said Jamshed Daboo, chief executive officer, Trent Hypermarket, the Tata Group enterprise.

The head of a hypermarket chain that has a presence in multiple cities said the problem is more in the metros. “There are very few malls designed to make retailing successful, and this has caused a dearth of quality spaces. This is also the reason why rentals are rising,” he said, requesting anonymity.

According to a report by CB Richard Ellis India, the real estate consultant, the second half of the current fiscal has seen rentals rising every where.

Rents in Delhi and the National Capital Region have increased by 9-11% on high streets and between 10-20% in other areas in the last six months, it said.

Rentals in Mumbai have gone up by 45%, while in Bangalore, they have increased between 4-15% across high streets and malls in the last six months.

In Hyderabad, high-street rentals are up between 18% and 35%, while in Pune and Kolkata it’s up by 15-25% in the last six months, CB Richard Ellis said.

This is in contrast to the scenario in 2008-09, when rentals had seen a correction of nearly 40% across major cities.

Pinakiranjan Mishra, national leader - retail and consumer products, Ernst & Young, the audit firm, said, “It (quality retail space) is continuing to be a challenge, and one of the reasons is that land is scarce in India. Unlike other countries, we have not been able to build retail outside cities due to lack of infrastructure. This challenge is not going to go away easily.”

Sanjay Coutinho, chief executive officer, Barista Coffee Company that runs the Barista Lavazza chain of cafes, said landlords are insisting on high rentals because there are enough retailers to cough up the money.

“Real estate is a major challenge in this country today as we are seeing unheard of prices. When the lease comes up for renewal, you end up paying anything between 50-100% higher than what you have been paying. It becomes difficult,” Coutinho said.  

The challenge of locating space that comes economical and promises high footfalls is far intense for large-format-stores like hypermarkets - a model that has been well accepted in urban India.

“It is a challenge to find retail space upward of 20,000 sq ft. Some retailers have to delay their entry till they find the right location,” Rajan Divekar, senior director, Deloitte Touche Tohmatsu India said.

Typically, retailers sign lease rentals for a period of 9 years. During the downturn, most retailers and mall owners sought recourse to the revenue-sharing model where the retailer shares a percentage of his revenue instead of paying a fixed rental. The percentage varies for different formats and categories.

Though this model has gained acceptance, analysts say that property developers who use the revenue-sharing model are not considering the long-term growth of the retail sector.