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Operating Income Of Mall Operators To Decline In FY21 By 45-60%

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Rental expenses form a sizeable share of the 12-16% of the revenues for retailers, therefore, in line with expectations, the tenants have been negotiating with the mall operators for a waiver or rebate on the rentals.

The mall operators have been significantly impacted due to the closure of operations for around three months, as per ICRA Research.

The impact on key financial metrics like net operating income and debt service coverage indicators will be acute in FY2021 due to the rent waivers. It will vary based on revenue share, cost optimisation and leverage levels

As malls have started opening gradually across the country, the terms between the mall operators and retailers are being revisited, broadly mall operators are agreeing to let go of the rents anywhere between 50% to 100% during the lockdown period.

Rental expenses form a sizeable share of the 12-16% of the revenues for retailers, therefore, in line with expectations, the tenants have been negotiating with the mall operators for a waiver or rebate on the rentals.

Mall operators generate almost complete income from the lease rentals received by the tenants. The retailers have been severely impacted and revenues for most of them have been reduced to zero during the closure period.

“People may fulfil their shopping requirements through e-commerce platforms or through local retailers in the near term, which may also impact the footfalls. In such a scenario most of the leveraged malls will have to take measures to fund the cash flow mismatches which are expected in the current year,” said Anand Kulkarni, assistant VP & associate head (Corporate Ratings), ICRA

Over the last few weeks, though malls in some cities have resumed operations, properties in some of the metros and tier-I cities are yet to resume due to the severity of the pandemic in the respective geographies. These markets are economically critical and uncertainty about opening malls in these geographies may hurt the players present in these markets.

ICRA expects the cash flows of malls in FY2021 to get significantly impacted due to the discounts being offered to the tenants in the minimum guarantee rentals. 

It notes that some of the vanilla or standalone retailers might not be able to resume operations even after the rental waivers due to weakening of their financial position. More than normal vacancy during FY2021 due to the same will pose a downside risk to the estimates.

The possibility of a structural shift towards a greater number of pure revenue-sharing agreements will be the key monitorable going forward. The lease rental discounting loans, currently availed by the mall operators, factor in a stable revenue stream in the form of a minimum guarantee rent.

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