In sign of downturn, Indian retail landlords finally capitulate on price

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The supply of new retail space is expected to tighten sharply from 2015. (Reuters) The supply of new retail space is expected to tighten sharply from 2015. (Reuters)
SummaryUsually tight-fisted retail landlords have become uncharacteristically flexible on rents.

In a capitulation that speaks to the depth of the slump in India's economy, usually tight-fisted retail landlords have become uncharacteristically flexible on rents, as Lacoste India CEO Rajesh Jain knows well.

The French brand name has been offered space at a mall in Jalandhar in Punjab. But rather than seeking a fixed rent, the landlord is willing to take a cut of Lacoste's revenue, a concession to the tenant to help it protect its sales margins.

"Discounts for a foreign lifestyle brand in a premium property were unheard of even a few months back, but now developers are coming to the table and are offering revenue share instead of rentals," Jain said, adding the landlord had also offered to furnish the store to secure Lacoste's tenancy.

Retailers in India say they can now negotiate revenue sharing deals or discounts on rent of up to 20 per cent and many are jumping at the chance, not necessarily because they see a bottom to the economic downturn but because the supply of new retail space is expected to tighten sharply from 2015.

"The discounts won't be higher than 20 per cent even if the economy doesn't improve in the next two quarters because the lack of supply is going to hit market sentiment very soon," said Saloni Nangia, president for retail at Technopak Consultants.

"There are not enough new malls being built," she said.

Landlords cut rents during the global financial crisis but traditionally have not been sensitive to changes in the economy, largely because they were cushioned by wide margins.

Now, they have been hit by a combination of factors. They have a lot of idle space, some of it expensive, after betting heavily on efforts by the government to open up the retail sector to foreign competitors.

But the expected wave of foreign retailers failed to materialise, forcing landlords to offer discounts even in the premium malls and popular high-street locations long impervious to a weakening economy.

That has coincided with the broader slide in the economy and the fall this year in the rupee to a record low. GDP growth is running below 5 per cent, less

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