Indian malls focusing on ‘minimum guarantee’ and ‘revenue sharing’ models

How are the Indian malls performing? The question is quite relevant since lots of optimisms, at times, have cropped up in the Indian scenario regarding malls and it is also expected that the (then) new culture would redefine Indian market. As per latest reports, mall vacancies in major retail destinations such as Delhi, Mumbai, Pune and Hyderabad climbed between 5% and 15% in June 2009 while developers rewire their strategies to sustain cash flows.

Take for instance, the past six months. In this time, developers getting frantic owing to an assortment of revenue models have found out a solution. They have concluded that certain “flexible” formats like ‘minimum guarantee’ and ‘revenue sharing’ have picked up steam.

Speaking on this Abhishek Kiran Gupta, Head — research of global real estate consultancy firm Jones Lang LaSalle Meghraj (JLLM), says, “Riding on a 30-40% annual rental growth in 2006 & 2007, and strengthening consumerism, developers in India planned and began constructing malls in dozens. A rental correction of 30-35% from the peak in 2008 was not able to entice retailers, leading to several malls becoming operational in the first six months of 2009 at high vacancies.”

On the word of Mr. Gupta, the mall vacancies have continued to increase between 5% and 5% in retail hotspots like Delhi, Mumbai, Pune, Bangalore and Hyderabad.

“Select malls like Inorbit and Forum Value Mall in Bangalore, along with Select City Walk in Delhi, have shifted to a combination of minimum guarantee and revenue sharing models, accompanied by a performance clause in the agreement. Depending on the format of the store and the tenant, the revenue-sharing terms are decided,” Mr. Gupta says, adding, “Such flexible revenue models are highly acceptable to the retailers as the risk is shared between the real estate owner and the retailer. Also, it makes the developer more accountable for generating footfalls and conversion rates in the mall. For the developer, it reduces the risk of high vacancy in the mall while counting on the probability of better revenues in future.”