Supply glut to keep mall rentals low

With an oversupply of retail space in cities like Delhi, Mumbai and Bangalore, mall rentals are expected to decline over the next two years. By 2006, the three cities will see an addition of 10.49 million sq ft of new retail space in the market, which will put pressure on mall rentals.

According to a Knight Frank report, mall rentals in Delhi may decline with increasing supply. Gurgaon will have a tremendous supply of retail space which, will affect the retail real estate rates in the suburban city.

"Mall rentals have surged nearly 15 per cent in the last 12 months and it should bottom out. If the expected organised retail growth rate of 20 per cent does not take off, the rentals can see a steep decline," Munish K Baldev, CEO of Ansal Plaza, said.

"The sustainability of some of the smaller malls could become questionable and the rentals may not go up at all," he added.

At present, mall rentals range between Rs 50 and Rs 260 per sq ft depending on their positioning and floor area ratio (FAR). With more malls becoming operational, the rentals are likely to stagnate or decline.

However, big retail chains like Lifestyle, Westside, Pantaloon and Shoppers Stop, which are the anchor tenants of most malls, may not see a steep downside in the rentals.

"The anchor tenants have a long term contracts and are safer bets. The rentals for the anchor tenants are less than other stores and will stay unaffected by increasing competition," Sandeep Runwal, director of Runwal Group, said.

In Mumbai, an aggregate of 4.7 million sq ft of retail space is expected to be added to the already existing 550.000 sq ft by 2005.

Also, there is a potential for about 1 million sq ft of already existing space in form of non-functional mills, which could be converted to retail space.

All this could put pressure on the mall rentals.

Also, with rentals in mall and high streets coming at par, small retailers who had shied away from the high street on account of prohibitively high rentals are looking at malls.

"Buying out space on high streets is becoming a costly proposition so malls are becoming a preferred option as the rentals are similar. At present, there is a demand from retailers but we have to see if this will sustain or not," Runwal added.