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High realty rentals putting brakes on retail dream


High realty rentals putting brakes on retail dream

Last updated: March 16 2007
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  • High realty rentals putting brakes on retail dream

    High rentals in malls are beginning to threaten the viability of retailers, a trend that could derail India’s mall mania. The pricing of most of the malls in the country is now at a high of almost Rs 20,000 per sq foot, whereas the market rate is anywhere between Rs 12,000-15,000 per sq foot. Rentals are in the range of Rs 170-250 per sq ft. An average sized store of 1,200 sq feet needs to pay monthly rent of between Rs 2.5-3 lakh per month. Unless sales can justify these rentals, their survival is at stake.

    Most retailers in malls across the country are finding it difficult to break even, says the study. Clearly, most mall developments will take longer to break-even, resulting in a slowdown in future investments. The study points out that some retailers have already shut shop due to the non-viability of business at current costs. For instance, more than 20 restaurants have shut down and over 7 stores selling lifestyle accessories have downed shutters in Gurgaon in the last one year. The solution lies with mall developers who could facilitate anchors with rentals lower than the original lease rentals.

    The government too can play a role in arresting this slowdown. According to the study, policy makers in India need to rescind laws that restrict the legal sale of property. “What needs redressal is duplication of authorities, an avoidable red tape that only serves to delay the already long-drawn process of securing approvals.

    However, despite all this and even though the Indian real estate market lacks transparency and liquidity as compared to more mature real estate markets, the market structure is changing rapidly.

    The study predicts that the demand for quality real estate will grow exponentially over the next 4-5 years fuelled by the demand from organised retailers.

    In fact, the total real estate required by the upcoming organised retail chains will be in the range of 500 mn sq ft, out of which 250 mn sq ft will be contributed by shopping malls. But, as per the current plans of real estate developers, only 143 million square feet of mall space is being planned over the next five years and this leaves the retail industry with a shortage of more than 40%.
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    Re : High realty rentals putting brakes on retail dream

    Retailers to move court against service tax

    MUMBAI: Top retailers are upset over the government’s decision to charge service tax on the already stinging rentals, they are planning to challenge the decision in a court of law.

    Several leading retailers like Kishore Biyani of Pantaloon Retail (Future Group), BS Nagesh of Shoppers’ Stop, Noel Tata of Trent and Vinay Nadkarni of Globus among others had a meeting in Mumbai to initiate their future course of action.

    A couple of legal firms have already been roped in to advise them on the issue, said sources. Retailers will initially make a representation to the government under the aegis of the Retailers Association of India (RAI). If things still do not work out, they might consider legal options, top officials said.

    The Union Budget imposed a 12% service tax on commercial rentals. The education cess on services has also gone up from 2% to 3%, taking the total service tax to be paid by the developer or the property owner to 12.4% of the rental income. Technically,
    • Service tax on rentals will have to be borne by landlords who lease out space to retailers.
    • Currently, over 90% of the modern formats are leased by retailers.
    • However, several lease agreements hold a clause which states that any additional tax or levy will have to be borne by the lessee.
    Bottomlines of retailers who operate on thin margins and high volumes are under severe pressure because of the high rentals in an overheated real estate market across the country. Most retailers are unwilling to pass on the burden to consumers since it would negate their competitive edge, i.e., pricing vis-à-vis the traditional kiranas who do not pay rent. There are a couple of retailers, however, who are planning to pass on the burden to consumers.

    “Rent is not a service from any angle. It is an unthinking decision made by the government without clearly examining the cause and effect. It will only add to the inflationary trend,” said Kishore Biyani, CEO of Pantaloon.

    Rentals are now expected to touch over 15% of sales from around 7-8% in the previous years, and retailers are worried over the eroding margins. Globally, rentals constitute just 3-4% of sales for retailers and no service tax is charged on rentals, industry officials said.

    The rush to secure prime locations has led to unrealistic expectations by mall and real estate developers. To deal with the pressure, several malls have begun moving into fixed rental and profit/revenue share to reduce pressure.

    The ratio of rentals for anchor tenants to regular tenants is also expected to go up from 1:3 to 1:10. Retailers are focusing on stepping up the mix of markets from metros to smaller towns where rentals are relatively lower than metros.

    “The direct effect of the service tax will be another 1% which is detrimental to our business which operates on thin margins. We are surprised that the government has done this to an industry where growth has just taken off,” said Andrew Levermore, CEO of HyperCity.

    Modern retail is currently growing at over 35% in urban and tier-II markets and several formats are furiously expanding across the country to corner space at prime locations. But the tax might just throw the retail growth story into a spin.

    - Economic times


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