Retailers Eye Lower Rentals, Freeze Expansion

The real estate market is increasingly behaving like the stock market these days. Just like buyers on the Street are putting off their purchases in anticipation of the market falling further, a sluggish real estate market is prompting retailers to postpone expansion plans on hopes of lower rentals. Some are even renegotiating rates for retail space booked earlier.

Reliance Retail, which has expanded rapidly in the past two years since its launch, is learnt to be “biding time”. The company is not looking at booking new space for the next few months, by when it thinks retail rentals would have fallen to a reasonable level. Other retailers, including Arvind Brands, Vishal Megamart and the Wadhawan group, which runs Sabka Bazaar, Spinach and The Home Store, Wills Lifestyle and many others are also going slowly.

This, however, has no impact on retailers’ plans to open new stores in places where they have already booked space. J Suresh, CEO, Arvind Brands said, “There is a clear trend towards decline in retail rentals. We are in no hurry to book space. We are able to book new space at a lower rate and also renegotiate rates for properties that we booked earlier”.

Adds Wadhawan Food Retail director Gaurav Modwel: “It’s only prudent that we become selective. It’s a buyer’s market now. We are booking only those spaces, where we get it really cheap.” The rentals have fallen in some markets in the past few months by 10-20%. And the correction in rentals has made retailers hold back on their real estate decision.

Wills Lifestyle CEO Chitranjan Dar said, “The mad rush to expand is now over. We are more cautious now. The rentals must come down to a level where an average retailer can make money”.

Retail rentals have doubled in the past three years, eating away on average 22-24% of retailers’ revenues. Internationally, rentals comprise 7-8% of retailers’ revenues.

The euphoria led by a booming economy and new-found opportunity in retail had prompted retailers, old and new alike, to expand rapidly even at the risk of lower earnings. Several retailers blamed higher rentals for their lower earnings last year.

But a double-digit inflation and RBI’s monetary measures to slow down demand have made retailers cautious. And this increased sense of hesitation has spread across all segments of retail and product categories. The signs of tough times are already visible in the market, where retailers are being forced to offer unseasonal discounts to push sales.

Another significant development is varying retail rentals in the same micro-market. Cushman & Wakefield India director (retail) Rajneesh Mahajan said, “Earlier, most malls in the same micro-market had similar rentals. However, as they become operational, rentals have started to get aligned with revenues and footfalls, and, therefore, we are also seeing differential pricing within the same micro-market”.

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