Revenue of shopping malls is foreseen growing 45-55% this fiscal after an expected 45% decline in fiscal 2021. That will still be 15-20% below the pre-pandemic levels because of continuing waivers for some underperforming retail segments and the possibility of fresh waivers across segments due to mobility curbs following the second wave of the Covid-19 pandemic, an analysis of India’s top 14 malls¹ rated by Crisil Ratings shows.

While fresh restrictions to curb the second wave of Covid-19 will affect retail sales, Crisil Ratings expects the debt-servicing ability of the malls it rates to be largely intact in the near term because of strong sponsors and healthy liquidity. Their average debt service coverage ratio is expected to decline 10-15%, but remain healthy.

Says Anuj Sethi, Senior Director, Crisil Ratings, “We foresee retail sales in malls declining significantly in the first quarter of this fiscal versus pre-pandemic levels because of fresh restrictions, and recovering gradually by the end of the first half. Retail sales are expected to be ~90% of pre-pandemic levels for the second half of this fiscal, which may not warrant rental waivers. That would minimise the impact on rental income of mall owners. Accelerated vaccinations are crucial to retail sales revival, especially for non-essentials.”

But the recovery in retail sales won’t be uniform. Malls in Maharashtra, which account for 35-40% of the revenue of the sample set, will be impacted the most because of the mini-lockdown currently imposed. Other key geographies have announced less-stringent restrictions. How the affliction curves shape up in these areas would bear watching.

Overall retail sales at malls declined 55% last fiscal. Although closures in the first half had a significant impact, gradual recovery after reopening provided an offset in the second half. Footfalls remained considerably lower than pre-pandemic levels, but average spend per footfall darted up more than 25%.

Recovery for most tenant categories, including apparels, cosmetics, electronics, luxury, and food & beverage, was above 70% by the end of last fiscal versus pre-pandemic levels. Cinema and family entertainment centres, though, continued to lag. These segments have suffered the most due to social distancing norms, and are expected to take the longest to recover. Mall owners may offer tapering concessions to such tenants. Although these two segments contribute less than 10% of aggregate revenue of the sample set, their revival is crucial for a broad-based growth in footfalls.

Says Anand Kulkarni, Director, Crisil Ratings, “While retail sales remain sluggish, occupancy at malls has seen only a moderate impact. For the sample set, it has fallen to ~90% in March 2021 from 94% a year ago. That is because of good asset quality, differentiated positioning, strong tenant profiles, and mall owner support in the form of rental waivers last fiscal.”

For mall owners, cost rationalisation lessened the impact on operating profitability, which is estimated to have contracted only 300 basis points to 65% last fiscal on-year for the sample set despite a sharp drop in revenue. Mall owners were able to cut costs by ~40%, supported by lower utility expenses during lockdowns and optimisation of manpower, part of which might continue.

Additionally, strong sponsor support, liquidity (in the form of debt service reserve account) for 1-3 months, and the Reserve Bank of India’s moratorium eased pressure on debt servicing obligations last fiscal.

That said, there is increasing risk of cannibalisation of retail revenue by online platforms. E-retail is expected to grow faster than traditional brick and mortar stores, driven by a pandemic-induced shift in consumer buying preferences. E-retail is expected to grow ~35% between fiscals 2020 and 2022 as adoption accelerates.

In the milieu, more online-offline partnerships can be expected.

¹ These malls have leasable space of more than 10 million square feet; are spread across 10 cities namely Ahmedabad, Amritsar, Bangalore (2), Bareilly, Chandigarh, Chennai (3), Indore, Mumbai (2), Lucknow and Pune; and have debt of ~Rs 6,500 crore.