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August 19, 2021 location Mumbai

Recovery on track for malls as second wave subsides

Liquidity buffers moderating for mall owners; strong sponsors, fund-raising ability to aid credit profiles

Malls have been recovering faster after the second wave compared with the first wave, supported by rapid easing of restrictions and pent-up demand. With retail sales in malls rebounding strongly post reopening, pressure on rentals for mall owners is likely to be lower this fiscal, necessitating lesser waivers, compared with last fiscal.

 

Rental revenue for mall owners is seen clawing back to 80-85% of pre-pandemic levels this fiscal, compared with 55-60% last fiscal. Also, while their liquidity may erode this fiscal as well, strong sponsor support and fund-raising initiatives will support credit profiles, an analysis of India’s top 14 malls1 rated by CRISIL Ratings shows.

 

Says Anand Kulkarni, Director, CRISIL Ratings, "Malls in Tier-I cities – except Mumbai and Pune – have reopened faster after the second wave. The median closure period for the top eight cities was 7-8 weeks compared with 13-14 weeks during the first wave. Further, retail sales in malls have already reached 55-60% of pre-pandemic run rate in the first month after reopening – a level that took 4-5 months to reach after the first wave. Improving consumer sentiment driven by faster vaccinations, pent-up demand and discount sales by major retailers have contributed to the recovery."

 

An intense third wave leading to closure of malls is a downside risk to these estimates. Retail sales and consequently rental revenue of mall owners could shrink up to 10% if the third wave impacts the festival season in the third quarter, which is generally the most productive period for malls.

 

Recovery for most tenant categories such as apparels, cosmetics, electronics and luxury, which account for 75-80% of the revenue of mall owners, was more than 70% of the pre-pandemic level by the end of last fiscal. These categories should see faster recovery owing to pent-up demand, which will reduce the burden on mall owners because of lesser rental waivers.

 

The cadence of recovery will vary for other segments, which contribute the balance revenues. Food and beverage, and cinema and family entertainment centres are expected to see only a gradual recovery. Revival in these segments is critical to boost footfalls. Such segments will also suffer from capacity loss due to shutdowns and may increasingly adopt a higher revenue share model for most part of the current fiscal. This will moderately affect mall rentals till retail sales of the weaker segments significantly improve.

 

The pace of recovery will be mixed across geographies, too, depending on the knock-on effect of the pandemic: malls in the southern states and Maharashtra would take longer to recover compared with those in the north.

 

Net-net, while the rental income of mall owners is likely to be better than last fiscal on the back of likely strong recovery in the second half, the complete recovery to pre-pandemic levels may happen only next fiscal.

 

Says Kshitij Jain, Associate Director, CRISIL Ratings, "The debt service coverage ratio (DSCR) will continue to be below 1 time for most mall owners this fiscal, indicating a dip in their liquidity reserves for debt servicing even in the base case. Liquidity, which was equal to six months of debt servicing obligations at the start of this fiscal, is expected to shrink by 1-2 months. That said, the strong sponsors and their ability to raise equity, or refinance debt, will continue to support the credit profiles of CRISIL rated malls."

 

While the performance of malls may remain subdued in the near term, investor confidence seems to have improved, as reflected in equity investments, funding for asset development, and outright asset purchases. This reinforces healthy long-term prospects, with malls remaining the 'go-to-destination' for entertainment.

 

1 These malls have leasable space of more than 10 million square feet; spread across 10 cities namely Ahmedabad, Amritsar, Bengaluru (2), Bareilly, Chandigarh, Chennai (3), Indore, Mumbai (2), Lucknow and Pune; and have debt of ~Rs 6,000 crore

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  • Anand Kulkarni
    Director
    CRISIL Ratings Limited
    B: +91 22 3342 3000
    anand.kulkarni@crisil.com