Expert Zone

Straight from the Specialists

Mall developers take to revenue-sharing to woo retailers

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Over the last five to seven years, the retail segment in India has evolved towards a more organized pricing structure. After the real estate boom of 2005-06, when property prices increased to as much as 40 percent of a retailer’s operating costs, developers seemed more willing to share the business risk. They moved from a per-square-foot rental model to versions of the minimum guarantee and/or the revenue share model. Most investment-grade properties in major cities now follow this model, unlike shopping centres in smaller cities.

In the original model, rentals varied depending on the store and location. But with increased brand awareness and rising vacancies, developers saw the need for a customized tenancy mix, adopting efficient mall management techniques while protecting retailer interests to maximize their own earnings.

This practice of revenue-sharing evolved with brands usually paying a minimum guarantee or a certain share of generated revenues each month. The adopted model varies according to individual developers or brand strength. Fashion apparel brands, for instance, often operate on a pure revenue-share model. For some apparel brands, revenue-share percentage across top Indian cities is between 10 and 14 percent; the range for footwear retail is between 12 and 14 percent while fashion accessories command around 8 percent.

The supermarket segment shares between 3 and 6 percent of revenues as rent, while the typical range for vanilla retailers is 1-3 percent. As far as location is concerned, the Saket retail district in New Delhi, for instance, takes in minimum guarantee monthly rentals in the range of 350 rupees to 450 rupees per square foot. In Gurgaon, it’s between 200 and 250 rupees while central Mumbai mall rentals are in the range of 475 to 600 rupees.

SEBI tries to get it REIT again

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Ease of funding is a key recommendation for the growth and development of the Indian realty sector in the coming decade. New instruments of funding should be allowed into the sector, especially real estate investment trusts (REITs) — an investment mechanism that buys income-generating real estate assets and passes on the yield to investors.

In this current climate of dwindling investor sentiment and a plunging rupee, there is a need to implement funding options such as REITs for infusing much needed liquidity into the sector. The total REIT market size in the Asia-Pacific region is approximately $205 billion but India has been unable to take advantage of this funding opportunity, mainly because of the lack of an existing regulatory framework.

The paradox of India’s real estate business

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Over the last two years, India has been battling various economic issues such as rising fiscal deficit, a falling rupee and increasing food inflation. No, nothing new there. And what does this have to do with real estate? Quite a lot.

A country’s economic performance has direct repercussions on how its real estate market behaves. This is especially true for the residential property segment. More prosperity means higher financial confidence among home buyers, and this leads to a greater demand for homes. The opposite is, of course, equally true.

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