How Revenue Share Works And Evaluating A Mall: JLL

Handling Mall Vacancies

Increased vacancy rates in malls can typically be attributed to three factors:

Normal churn, which is desirable

The available spaces are not conducive to retail, or exist in a center that has been over-built

Spaces that are not conducive for retail have not been reinvented for alternate use. In an over-build situation, it will take time to find takers for such spaces

Mall owners guard against vacancy in mall in the following ways:

Launching the mall at 85% plus occupancy

Choosing an initial set of brands that works well in a given location - either on the basis of the format or products being suitable for the location and catchment, or because of store sizes are suitable for those brands, or on the basis of an overall strategy for the region leading to lower drop-outs

Good tenure completion strategy As ongoing occupier tenures complete, landlords look at churning in order to get new brands into the mall. At this point, they may aim to position the mall at a higher profile. They would ensure that this positioning is applicable for the given location and that the concurrent increase in rentals is not beyond the normal growth of escalation.

Most vacant spaces in malls get reused. In the case of malls that are older than nine years, landlords often consider upgrading the entire center, or parts of the center. They may have an alternate development strategy according to which they will remodel the spaces and redesign / rezone the center.

The Learning Curve

India has enough retailing in most micro markets, and there is sufficient experiential basis for them for them to understand the benchmarks and figure out if their products will work well or not. Experienced retailers right-size for efficiency, productivity and economy.

The best-performing malls are always in demand by retailers, and are in a position to pick their tenants. Mall owners always have the choice of improving the tenant mix by seeking out the kind of retailers that work best for the catchment in question. They can also make strategic improvements to the center, or offer something unique to make the overall shopping experience more complete. These kinds of strategies usually need to be formulated and implemented either by the existing mall marketing manager or by professional agencies.

How The Revenue Share Model Works

Indian retail has moved into a consumption-based mode. Retailers offer minimum guarantee and revenue share, where the revenue share is a percentage of the profits generated by actual performance. Mall rentals in most locations are high, and minimum guarantees in the first couple of years are always above revenue share. This brings into play the retailers ability to pay therefore, the revenue share does not kick in over the short term. Revenue share usually becomes a factor after anything between 3 months to 3 years of active tenancy, depending on how the center is priced during its initial leasing.

The revenue share model is a means to make the expensive real estate viable. There is an underlying interest of the landlord to reach a higher rent, which the retailer is unable to pay. Good retailers take the benefit of a reduced minimum guarantee, thus reducing their fixed cost and thereafter ensuring that they deliver superior returns by reaching revenue share and sharing the upside with the landlord. More retailers should adopt this philosophy.

Retailer's Pre-Lease Checklists

In today's scenario, retailers should look for certain aspects in a mall before taking up space there:

  • Professional mall management
  • Professional maintenance of the center
  • Scientifically formulated tenant mix
  • Adequate parking
  • Adequate location of the store