Tension has built up between brands and malls across India with leading malls planning to increase rentals every year, putting them at loggerheads with retailers who are negotiating to retain the current system of rental hikes every three years.
While discussions have started, industry insiders said large retailers are opposing the move given the number of stores they operate. Malls typically sign nine year agreements with the retailers with a rental hike of 15% every three year. But by increasing the rent 5% each year, retailers will have to shell out about 17% in lease cost in three years.
“It does not make any sense because we sign our properties for long term which is generally 12-15 years. An annual escalation in rent will not be viable and we would want to not go ahead with such short term demands,” said a chief executive officer at a departmental store chain.
Rajendra Kalkar, president-west at Phoenix Mills, which operates more than half a dozen malls in Mumbai, Pune and Bengaluru, and in some tier-2 cities said that rent hikes are as per the original agreed terms of the agreement. But in the new agreements, whether to go for an annual hike is being negotiated on a case to case basis.
Another retailer, asking not to be named, said, brands invest a lot in fit outs and annual rental hike will make the business unviable.
“A brand has to manage so many stores that annual hike will lead to a chaotic situation where every month brands will have to keep rental hike in mind,” said the retailer.
Sources said that other malls such as DLF, Nexus and Oberoi, Select City Walk, Vegas are also considering the same.
“We have started something like staggered rental so that we can hike the rental every year. However, in the first year. we don’t put much pressure because the brand is trying to settle in. But once they start doing well, we push for a rental hike,” said the director of a leading mall, requesting anonymity.
Single brand retailers feel that demand is strong and they may be able to absorb rent inflation, if at all it goes through.
Mall developers said that they will push for a 20% rental hike in three years given the inflation and cost of raw materials.
“Cost of everything has gone up and we will have to put it in fresh condition to sustain. Retailers are doing good and they should not be hesitant in absorbing the hike,” said another mall developer.