Soaring rents worry retail chains

Both Indian and international retailers find the challenge of locating suitable commercial space daunting. Now, such space is also one of the most expensive internationally. So much so retailers say the ‘shocking’ and ‘unbelievably high’ property prices savage their rent-to-revenue ratio, making their business unviable.

On an aggregated basis, Indian retail rentals are considered cheap as some pockets command prices comparable to cities in the US, to Tokyo in Japan and to London in the UK, says Nimisha Jain, principal at The Boston Consulting Group India. 

Still, most international retailers are willing to stretch their budgets for a highly lucrative retail market as India. Retail analysts say rentals have climbed to 2007 levels again after dipping in between. Premium malls and high streets like Linking Road in Mumbai command significantly high rentals as every premium brand is practically fighting for the same limited space.

This also impacts their rate of expansion. But the retail industry, experts say, is a cash-guzzling business and takes years to break even. The wait for newer players to make a profitable business thus is usually longer. Brands like Miss Sixty are exiting non-viable properties and looking to shift to multi-brand formats rather than expanding under standalone stores. The brand is shutting down its store at the DLF Place Mall (pictured alongside), Delhi, saying it is non-viable due to high rentals. The brand has also been scouting for properties on Mumbai’s high street Linking Road for sometime now. 

Even as organised retail is in its infancy in the country, there are fewer options for brands that want to open their stores at proven locations, says Niladri Mazumdar, vice-president, sales and marketing, Seiko Watch India. “Currently, retail rentals are astronomical because there are so few options. It is a business reality, you have to hedge your bets and understand that on some places, you cannot invest and keep bleeding.” If rentals had worked out better, the watch company that plans to have ten exclusive boutiques in a couple of years, would have liked to open at least 20, Mazumdar adds.

Last week, French luxury women’s footwear brand Christian Louboutin opened its first store in India at Delhi’s DLF Emporio, followed by American home and lifestyle chain Steuben that recently started its India operations. In the second half of calendar year 2011, the mall had seen rentals appreciate by 10-11% while Delhi’s neighbour Gurgaon had seen rentals increase by 15%, according to a study by real estate services firm CB Richard Ellis. In the last few months, Gurgaon has also seen international brands like Bebe, Steve Madden and WH Smith open shops.

The study also suggests that key locations in Mumbai saw a 15-20% increase in rentals as retailers’ inquiries have increased significantly since the second half of 2011. 

The high rentals are a result of real estate demand as well as the demand-supply mismatch of quality retail space. Since 2008, most retailers have initiated renegotiation of rentals while chalking out various models like revenue sharing with property developers. But revenue share where the retailer pays the property owner a percentage of his revenues or a minimum guarantee pre-decided rental (whichever is higher), has only been adopted by 20% of the market so far.

Gudjon Reynisson, chief executive officer of the world’s largest toy chain Hamleys, says that while its Indian partner Reliance Retail has been handling all rent negotiations and scouting for properties, rentals in cities like Mumbai and Delhi were indeed high — sometimes even higher than many international markets. “Rent is a very important part of the equation that all retailers have to look at and at times when they are high it becomes very challenging.”