Buoyant retail sales and improved rental yields are expected to lift the revenue of mall operators by 7-9% this fiscal. That would be tantamount to ~125% of pre-pandemic, or fiscal 2020, revenue.

Notably, this will be on a high base of fiscal 2023, when a return to social normalcy after mobility curbs were lifted led to substantial growth in footfalls and a robust 60% rise in revenue to ~116% of the pre-pandemic level.

Additionally, high occupancy levels, solid profitability backed by cost-optimisation measures and strong balance sheets will keep the credit risk profiles of mall operators healthy this fiscal.

A CRISIL Ratings analysis of 28 malls¹ indicates as much.

Says Mohit Makhija, Senior Director, CRISIL Ratings, “Robust retail sales will help mall operators increase revenue in two ways. One, occupancy of ~95% will translate to better rental rates for new leases. Two, 10-15% of the revenue of mall operators is linked to retail sales via revenue share income², which will increase this fiscal. Additionally, operators will get contractual rent escalations of 4-5% as well.”

The exceptional revenue growth last fiscal was on a significantly weak base. In fiscals 2021 and 2022, revenue stood at 55% and 74% of the pre-pandemic level, respectively, as mall operators had waived off rent and allowed flexible payment terms to tenants in a bid to prevent any major decline in occupancy. As the impact of Covid-19 waned and occupancy increased, average per square feet leasing rate jumped 12-14% in fiscal 2023.

The benefits of healthy occupancy and better leasing rates will continue this fiscal as well.

The pandemic also goaded mall operators to reduce costs through efficient manpower planning and optimisation of overheads. That should continue this fiscal as well.

Says Anand Kulkarni, Director, CRISIL Ratings, “Cost efficiency measures taken during the pandemic are likely to help improve profitability. Operating margin is expected at ~70% this fiscal compared with the pre-pandemic level of 65-68%. Further, improvement in leverage through equity infusion will keep credit risk profiles stable. Continued investor interest in the sector through platforms such as real estate investment trusts (REITs) also bode well.”

Low debt level will translate to comfortable debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) of ~3 times, and healthy debt service coverage ratio (DSCR)³ of 1.7-1.8 times this fiscal (similar to fiscal 2023 but a significant improvement from ~1.2 times in fiscal 2022).

Considering the healthy performance of the sector, capex is expected to pick-up over the near to medium term. While a sizeable part of it may be funded by equity from global investors, large debt contracted for new developments will bear watching.

On the flipside, the impact of slowdown in advanced economies, and the manifestation of the lagged effect of repo rate hikes of the past can curtail discretionary spending, including retail sales. This aspect will, therefore, be monitorable.

¹ These malls have leasable space of around 18 million square feet spread across 17 cities, with total debt of over Rs 8,000 crore
² Typically, mall operators generate ~85% of their income from minimum guaranteed rentals as per lease agreements, while the rest is linked to the revenue performance of the tenants
³ DSCR is a measure of sufficiency of cash earnings of a business that is available for debt and interest repayments. It is calculated and averaged over a period that typically covers the tenure of the loans contracted. The higher the DSCR, the stronger the repayment capacity of a business.