Rating agency ICRA expects rental income for the retail mall operators to increase by 8-10% year-on-year (YoY) in financial year 23-24 (FY24) owing to improvement in trading values due to healthy retail sales and contracted rental escalations. In FY24, trading values are expected to improve by 4-5% with healthy sales across the product categories such as jewellery, electronics, apparels and increase in spends toward food, beverages and entertainment segments. Further, the rental rates are forecast to increase by 3-4% YoY in FY24, driven by contracted escalations and lease renewals at higher rates due to healthy occupancy of retail malls.
Anupama Reddy, vice-president and co-group head, corporate ratings, ICRA, said, “Rental income for ICRA’s sample set witnessed strong expansion of 78% YoY in FY23 and is higher by 25-27% compared to pre-Covid levels, driven by higher revenue share backed by increase in retail trading values and increase in occupancy levels. While the footfalls in the malls reached 90-95% of pre-Covid levels FY23, trading values recovered to 125-127%, backed by increase in spend per footfall, driven by premiumisation. Higher disposable income and preference for experiential shopping, especially for premium product categories, are expected to support the retail malls in the medium term.”
Consumer confidence continues to recover from the historic low recorded in June 2020. As per RBI’s Consumer Confidence Survey of May 2023, household spending was buoyant over the last year on the back of higher essential and non-essential spending. This is expected to support retail sales for the tenants of mall operators. Overall, ICRA’s outlook on retail mall operators is stable.
Across the top six cities in India, the incremental supply stood at approximately 7 million square foot (msf) against net absorption of around 4 msf resulting in increase in vacancy levels to 19% in FY23 from 16-17% in FY21-FY22. Despite healthy leasing, the vacancy levels are expected to remain between 18-19% in FY24, given the high new supply of 9-10 msf. Delhi NCR and Chennai will account for around 60% of the FY24 new supply and 17% of the upcoming supply in FY24 has been pre-leased.
“The credit profile of the mall operators is expected to remain stable, driven by healthy growth in net operating income (NOI), moderate leverage and comfortable debt coverage metrics. The leverage metrics of the players as measured by debt/NOI is expected to improve to 5x-5.5x in FY24, from 5.5-6.0x in FY23. Even after factoring in the increase in interest rates, the coverage metrics are expected to remain comfortable at 1.35x-1.4x in FY24, compared to 1.3-1.35x in FY23, on the back of scheduled repayments and an improved NOI level,” Reddy added.
