The real estate market is increasingly mirroring the behavior of the stock market lately. Just as buyers on Wall Street are delaying their acquisitions, anticipating further declines, retail establishments are likewise stalling their expansion strategies in hopes of securing lower rental rates. Some retailers are even choosing to renegotiate existing agreements on previously booked retail spaces.
Reliance Retail, having experienced rapid expansion over the last two years since its inception, appears to be "biding time". The organization is opting not to secure any new space in the next few months, predicting that retail rentals will decrease to a more acceptable range by then. Other retailers, including Arvind Brands, Vishal Megamart, and the Wadhawan Group—which operates Sabka Bazaar, Spinach, and The Home Store, alongside Wills Lifestyle—are also proceeding with caution.
Despite this measured approach, it does not affect the retailers’ strategies to inaugurate new stores in locations for which they have already secured spaces. J Suresh, CEO of Arvind Brands, articulated, "There is a clear trend towards decline in retail rentals. We are in no hurry to book space. We are able to book new space at a lower rate and also renegotiate rates for properties that we booked earlier".
Gaurav Modwel, Director of Wadhawan Food Retail, commented, "It’s only prudent that we become selective. It’s a buyer’s market now. We are booking only those spaces where we can secure them at exceptionally low rates." Recent trends indicate that rental prices have dropped in some regions by 10-20% over the past few months, compelling retailers to reconsider their real estate strategies.
Chitranjan Dar, CEO of Wills Lifestyle, stated, "The mad rush to expand is now over. We are more cautious now. The rentals must come down to levels where an average retailer can generate profit." Over the past three years, retail rentals have doubled, consuming an average of 22-24% of retailers’ revenues, a stark contrast to international standards, where rentals typically account for just 7-8%.
Previously, the surge in retail expansion was driven by a robust economy and new opportunities, leading to quick ventures into new markets, even at the cost of reduced earnings. Many retailers have cited soaring rental costs as a key factor behind their lower profits last year.
However, the confluence of double-digit inflation and the Reserve Bank of India’s measures to temper demand has engendered a climate of caution among retailers. This hesitancy has permeated through all retail segments and product offerings. The repercussions of these tough market conditions are evidently present, compelling retailers to resort to off-season discounts to stimulate sales.
Moreover, a notable trend is the variation in retail rentals within the same micro-market. Rajneesh Mahajan, Director of Retail at Cushman & Wakefield India, noted, "Earlier, most malls within the same micro-market had similar rental rates. However, as they become operational, rentals have started to align with revenues and customer footfall, and this has resulted in differential pricing within the same micro-market."