Retail rentals to dip further, correction of 25% likely
The Financial Express, March 17, 2009, Page 3
Kakoly Chatterjee
New DelhiOffice and retail rentals are likely to see a further dip in the coming months. Of the two, retail is going to be worse hit. Even after a 10%-15% correction till December, the latest retail launches are set to experience a further correction of 25%.
In order to cope with the current crisis many of the retailers are innovating their business model. Some are getting into a revenue sharing model with the mall owners. Here retailers share a percentage of their profits with mall owners depending on the agreement they have with each other and have to pay lesser rentals as a result.
Some retailers are also going for the shop-in-shop format where the retailers are lending out some of their space to other retailers. Delhi-based retailer, Vishal Megamart has lent out part of its space to laundry retail chain White Tiger and retailer Shopper’s Stop has given out space to Crossword stores even though the last two belong to the same entity-namely the Raheja group.
Most big developers are going for revenue sharing model. But for retailers they are not going for a universal agreement with the mall owners. It is mostly on one to one basis and depending on the location. While this model was prevalent in 20% cases before, this trend is increasingly gaining more popularity in the current scenario.
According to a Religare report the lease rental to gross profit for the period 2007-2008 for Pantaloons was 21%, Vishal Megamart 15%, Provogue 11% and Shopper’s Stop 25%. Analysts believe that these numbers are very high because of unusually high property rates. The international standard for lease rental to gross profit is around 6%. Experts believe, with the price correction across all segments of real estate this ratio is likely to come down to around 10% this year.
Some retailers who had open contracts are renegotiating their deal. Vishal Megamart has been able to get a discount of 15% for most of its rented spaces.
Commercial rentals have also dropped across all sectors. Sanjay Dutt, CEO (business) Jones Lang LaSalle Meghraj said, “A huge future supply and softening demand will push vacancy up across cities in 2009. Pan-India grade A office vacancies will rise from 5% in 2007 to 17% in 2009”. Residential catchments dependent on office worker-based occupancy will see a corresponding dip.
With considerable commercial supply coming in over the next 12 months it is likely to increase competition. Residential will see a corresponding reduction in demand from office-based residential occupants. There will be a slowdown in additional demand for IT/ITES spaces, so previously projected growth will be compromised.
As a result commercial rentals will continue to decline for another 15-18 months, after which they will reach equilibrium point and begin to pick up from there.
The Financial Express, March 17, 2009, Page 3
Kakoly Chatterjee
New DelhiOffice and retail rentals are likely to see a further dip in the coming months. Of the two, retail is going to be worse hit. Even after a 10%-15% correction till December, the latest retail launches are set to experience a further correction of 25%.
In order to cope with the current crisis many of the retailers are innovating their business model. Some are getting into a revenue sharing model with the mall owners. Here retailers share a percentage of their profits with mall owners depending on the agreement they have with each other and have to pay lesser rentals as a result.
Some retailers are also going for the shop-in-shop format where the retailers are lending out some of their space to other retailers. Delhi-based retailer, Vishal Megamart has lent out part of its space to laundry retail chain White Tiger and retailer Shopper’s Stop has given out space to Crossword stores even though the last two belong to the same entity-namely the Raheja group.
Most big developers are going for revenue sharing model. But for retailers they are not going for a universal agreement with the mall owners. It is mostly on one to one basis and depending on the location. While this model was prevalent in 20% cases before, this trend is increasingly gaining more popularity in the current scenario.
According to a Religare report the lease rental to gross profit for the period 2007-2008 for Pantaloons was 21%, Vishal Megamart 15%, Provogue 11% and Shopper’s Stop 25%. Analysts believe that these numbers are very high because of unusually high property rates. The international standard for lease rental to gross profit is around 6%. Experts believe, with the price correction across all segments of real estate this ratio is likely to come down to around 10% this year.
Some retailers who had open contracts are renegotiating their deal. Vishal Megamart has been able to get a discount of 15% for most of its rented spaces.
Commercial rentals have also dropped across all sectors. Sanjay Dutt, CEO (business) Jones Lang LaSalle Meghraj said, “A huge future supply and softening demand will push vacancy up across cities in 2009. Pan-India grade A office vacancies will rise from 5% in 2007 to 17% in 2009”. Residential catchments dependent on office worker-based occupancy will see a corresponding dip.
With considerable commercial supply coming in over the next 12 months it is likely to increase competition. Residential will see a corresponding reduction in demand from office-based residential occupants. There will be a slowdown in additional demand for IT/ITES spaces, so previously projected growth will be compromised.
As a result commercial rentals will continue to decline for another 15-18 months, after which they will reach equilibrium point and begin to pick up from there.
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