If you are planning to build a shopping mall here is an insight into how much do indian retailers pay mall owners as Revenue Share Rent   1 comment


INTRODUCTION

In most established international markets, retail tenants do not pay a fixed rent to mall owners or landlords. The most common best practice followed globally is turnover rent, or as we call it in India – revenue share rent.When organizations such as Propzone (then ICS Broll) and Asipac tried to introduce this concept back in 2004, most retailers resisted. In fact, some leading retailers even threatened that they would stop dealing with Propzone and Asipac. However, by the year 2006, because rental asks from developers and landlords started shooting through the roof, some of the larger or more established players started to come around to the fact that this globally accepted best practice was the true way to establish a healthy win-all partnership between the owner and occupant. The drive towards revenue share got a major push during the 15 month recession period in 2008-09, as retailers thought this was the best way for them to reduce risk. Finally, this globally prevalent best practice became an accepted norm in India as well. As they say, all’s well that end’s well. So what is this revenue share or turnover rent model? Although there are multiple types of  arrangements in the revenue share model, the most common one is where the retailer pays the owner or landlord a percentage of its sales turnover or revenue (less VAT or Entertainment Tax or Service Tax or other similar tax), or a Minimum Guaranteed rent (referred to as MG, but also called Base Rent in some markets), whichever is higher. Other models include a Provisional Rent (“PR”) instead of a minimum guaranteed rent, where the starting Provisional Rent is usually higher than what the MG would have been, and is reset every year, based on the previous year’s actual achieved revenue share rent. This model, while reducing the retailer’s risk during slowdowns or recession, greatly improve the owner’s cash flow and also protect the owner from unnecessary rent reductions during a downturn.

One could also build-in a minimum guarantee clause within the PR model, where the MG could be at least 75% of the previous year’s PR.Many other permutations and combinations of the revenue share model can be negotiated.The exact percentage to be paid by a retailer depends on the nature of the retailer’s business, their anticipated trading density and gross margins in that category. Prevalent percentages in  India range from as low as 1.5% to as high as 30%. Sometimes, the negotiated percentage  figure depends on the location of a mall, its size, the developer’s past record, the importance of the particular retailer for a particular mall and finally, both parties’ negotiation skills.There are also complex arrangements of revenue share, such as variable percentages depending on time (i.e., different for the first year, the second year and from the third year  onwards) or based on volume (i.e., the revenue share percentage either increases or  decreases when the retailer’s turnover crosses a threshold). Established mall owners with a  good track record may also insert clauses which protect them from comparative under  performance by the retailer. Under the fixed rent model, the owner is not much concerned about how the individual  retailer is performing within the mall. This puts the parties on opposite sides. On the other  hand, in the revenue share model, the rental revenue of the owner is directly dependant on  the sales revenue of the retailer. Thus, it is in the interest of the owner to increase footfalls  and conversions with better mall management and marketing. Therefore, the relationship  between the parties changes to a true partnership. Clearly, no one can dispute that the revenue share model is a win-win model. But how are mall owners to decide the percentage of revenue share? This study hopes to  demystify that question. The data presented in this study, along with the conclusions, will help  retail property owners and developers to do research-led decision making in the selection and  placement of retail stores in shopping centres (malls) and in freezing that magic figure of %  revenue share, in order to achieve a sustainable relationship. This study is the fourth in a series of research-led studies that Asipac has planned on Indian retail in general and retail real estate in particular. Two of our past studies were published in  multiple publications, including daily newspapers, business dailies, business magazines and  industry magazines. We hope that the findings of this study will help faster deal closures and  bring greater transparency into the system. The data is presented in a fairly simple format. Numbers pertaining to trading density are given in Rupees psfpm (per square foot per month).

ABBREVIATIONS

  1. PPP – per capita GDP

  2. EBO – Exclusive Brand Outlet

  3. MBO – Multi Brand Outlet

  4. psfpm – Indian Rupees Per Square Foot Per Month

  5. ATD – Average Trading Density

  6. RS% – Revenue Share Percentage

  7. ERR – Effective Revenue Share Rent in Indian Rupees Per Square Foot of Carpet Area Per Month

  8. FCC – Food Court Counter

Revenue Share Ratios of Different Retail Formats in Indian Malls Notes: All Revenue Share %s exclude CAM, the ATD is on carpet area; all numbers are indicative and vary from location to location, property to property, store sizes, location within mall, etc.

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Posted May 31, 2012 by avinash2060 in Shopping

One response to “If you are planning to build a shopping mall here is an insight into how much do indian retailers pay mall owners as Revenue Share Rent

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