Retail space rentals getting rationalized

Published: September 30, 2008

With realty prices sliding, retailers are looking to renegotiate rentals signed in better times. In some cases, they are even shutting and relocating stores to offset the drag on profitability.

Kishore Biyani, managing director of Pantaloon Retail (India) Ltd, India’s biggest publicly traded retailer, said store rentals are down by 25-50%. “We are renegotiating the rentals in some cases,” he said, but declined to elaborate.

However, Thomas Varghese, chief executive officer of Aditya Birla Retail Ltd, which operates the More retail chain, said while rentals have softened for big stores, they remain unchanged for smaller shops.
The latest to join the pack is The MobileStore Ltd, a venture of the Essar Group that sells telecom products such as mobile phones.

“We have signed deals on high rentals a year back and now the rentals are coming down by almost 50%,” said chief executive officer Rajiv Agarwal. “We are renegotiating with the owners and whoever is refusing to revise the prices, we are relocating the store to a viable location having lesser rentals.”

The company currently operates some 1,200 stores and plans to shutter 5% of those — primarily in metros — if rentals can’t be renegotiated, Agarwal said. Three stores have already been shut, even as the company plans to add another 600 shops across India, because volumes have gone up, he said.

The company is not alone in walking away from contracts signed at a time when the economy looked better, oil had yet to cross $100 (Rs4,640) a barrel and inflation was in single digits.
Rentals typically are 15% of gross revenues for small properties, 5% for hypermarkets and 7% for departmental stores, said Shubhranshu Pani, Mumbai-based managing director of retail services at real-estate consulting firm Jones Lang LaSalle Meghraj.

Other retailers Mint spoke with also said they were trying to take advantage of cheaper commercial space and moving to more affordable places when renegotiations fail.
“We have started renegotiating the rentals with property owners where it is unreasonable, especially in places like Bangalore, Chennai and other metros,” said Suresh J., chief executive officer of Arvind Brands Ltd, which operates the Megamart retail chain. Rentals have come down by around 50-80% depending on location, he said.

However, the company will not close shops should negotiations fail, since they have long-term agreements with property owners and could face lawsuits if it terminates such deals, he clarified.
Samar Shiekhawat, vice-president of marketing at Spencer’s Retail Ltd, an RPG group company, said that since rentals have started declining by around 20-25%, the company is renegotiating with owners.
The retailer plans to relocate some 46 stores this year, of which 20 have already been shuttered, a key reason being high rentals, Shiekhawat said.

However, the company will continue with plans to have 300 more stores by next March, in addition to the 365 small and 35 large shops it now runs.
Anuj Puri, chairman and country head of Jones Lang LaSalle Meghraj, agreed rentals are falling in select malls and smaller stores. “Only in those malls where the turnover was less, the rentals are coming down,” he said. “However, rentals in malls like Select Citywalk in Delhi, Inorbit and Phoenix in Mumbai and a few others in Bangalore are not coming down since the sales turnover is very good in these malls.”
For smaller stores, rentals are down by 15-20%, he said, adding that prices are likely to be stable and unlikely to fall further.
Puri said retailers who got small stores in malls last year typically paid between 35% and 40% more than the anchor — the largest store in a mall. These rents are now coming down by 25-30%, effectively reducing the gap between the smaller stores and anchors.
But the profits of retailers that are relocating will be impacted negatively, he said.
“Already, the margins are squeezed and to continue with high-rental outlets does not make sense. With the rentals coming down by around 40-50%, I want the reduced rentals,” said Agarwal of MobileStore. “Why should the company carry on with properties which have been signed at unreasonable rentals?”


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